Dubai sets up support fund as it launched second part of its sovereign bond programme

 

The Government of Dubai has unveiled a Financial Support Fund, designed to manage and distribute US $20 billion worth of state funds to government owned entities.

The support fund is aimed at government and government-linked companies and institutions and not at private companies

 

The fund will give loans on a commercial basis to government and government-related entities deemed to be of "strategic and development importance to the emirate of Dubai", according to a government statement.

Dubai also launched the second tranche of its US $20 billion sovereign bond programme, turning to foreign as well as local banks. The first $10 billion tranche was sold to the UAE Central Bank.

Dubai launched the bond programme in February to give financial assistance to state-linked companies caught in the midst of the global economic downturn.

 

22 July 2009

 

Analysis and forecast (↑ increasing risk)

 

The launch of the second tranche of the sovereign bond programme and the accompanying official announcements indicate that Dubai continues to suffer serious financial difficulties, perhaps even greater than previously thought. There has been considerable vagueness in the government announcements, contrary to previous attempts of showing greater transparency, practiced by ousted director of finance of Dubai Nasser Al Sheikh.

 

Reverting to unclear announcements raises questions about what the money will be used for, especially that various pieces of news in the past several weeks indicate possible problems faced by many government-owned and government-related entitites. In particular, the question of whether any of the money raised will be given to Nakheel, which has a US $3.5 billion worth of Islamic bonds maturing in December 2009.

 

Although the governor of the UAE central bank has indicated that the federal government “may” subscribe to the second tranche (it has fully subscribed to the first), his announcement reflects a lack of enthusiasm by the Abu Dhabi-controlled federal government to come to Dubai’s rescue. This puts further pressure on Dubai.

 

It remains to be seen who will subscribe to the second tranche of the bond and the manner this will be managed, will indicate the health of the Dubai economy. However, as things stand, the large degree of uncertainty does not help to boost Dubai’s global image, which it so much depends on.

 

 

UAE government moves to protect worker’s wages

 

The UAE Labour Minister Saqr Gobash Saeed Gobash issued a decision stipulating that workers in the UAE are to be paid their salaries through banks and financial institutions, as part of the implementation of the first phase of the Wage Protection System (WPS).

 

The WPS will enable the ministry to automatically check if any company is defaulting on salaries or making unlawful deductions from the salaries through online notifications. Financial institutions, which the workers' salaries are being transferred to, will feed these details into the WPS.

 

The WPS was introduced following an agreement between the ministry and the central bank in May 2009.

 

20 July 2009

 

Analysis and forecast (↓ decreasing risk)

 

The move by the UAE government to ensure salaries are paid promptly to workers will address an increasing tendency of companies, particularly in Dubai, to delay salary payments, something that has had repercussions on other segments of the economy. As a result, there were increases in labour disputes prompting the government to add more judges to settle such disputes. Also as a result, the number of loan defaults increased. There was also increasing criticism from international human rights groups on this rapidly wide-spreading practice.

 

The introduction of the WPS will ensure that such delays of payments are avoided, as companies will be faced with severe penalties if found to be violating the law.

 

It has to be noted that the introduction of the WPS will undoubtedly enable the introduction of income tax or social contribution, as this now can be automatically deducted from an employees salary.