Why would Qatar and Abu Dhabi issue bonds?

Qatar and Abu Dhabi are presently sounding out global capital markets for government bond issues that will help finance their ambitious domestic expansion plans, according to the Financial Times. But if you are as rich as Qatar and Abu Dhabi why would you want to raise money this way?

This is a conundrum. Why if you can fund projects from your own equity would you want to borrow from another source to do so. It just adds to a project’s true cost.

It is the national equivalent of a wealthy person running up a credit card debt to pay their expenses. Of course, if you are leveraging up to increase the assets on your balance sheet that is another thing.

Rate of return

But you would need to be sure that your projects were at the very least going to earn a commercial rate of return. That is not always the case for prestige projects like museums or even real estate if it stands empty.

However, there is another reason for creating a domestic bond market and issuing government debt. That is to establish a new local benchmark for debt and to bring down the cost of borrowing for other borrowers too.

Indeed, local bankers have argued for a long time that something like this needed to be done to add depth and sophistication to local capital markets, and cut the cost of debt.

For local businesses in the UAE and Qatar this would be very welcome. The cost of borrowing has risen sharply recently due to the liquidity squeeze that followed the global banking crisis last autumn, a factor that has deepened the property downturn in the Gulf states.

Dubai bonds

In any event the crisis has already spurred the development of the regional government bond market with the launch of the $20 billion Dubai bond program which has been 50 per cent subscribed by the UAE central bank.

This offered money at four per cent over five years. If bank borrowing in the UAE and Qatar could be benchmarked at this sort of level then this would be very helpful to the local private sector now confronting a slump in global trade, tourism and financial services as well as a real estate correction.