Dubai government has launched a long term bond program of USD20bn (Dh 73.4bn) to press ahead with its development plans and stoke economic growth. The bond is an unsecured fixed rate paper, yielding four per cent per annum and has a five-year maturity period.

 The Central Bank of the United Arab Emirates (UAE)Central Bank of the United Arab Emirates (UAE) had subscribed to the first tranche of 10 billion dollars (Dh36.7bn) of the issue. While Dubai has benefited tremendously from lower barriers to the global flow of labor, capital and ideas, it has also borrowed heavily to build up a non-oil economy.

 The economy has diversified into highly cyclical sectors, like real estate, tourism, financial services and trade, all of which are now being impacted by the global economic crisis.

 The real estate sector, a pillar of the economy, is facing a sharp price correction. Property prices have fallen at least a quarter from a peak in 2008, and banks have taken heavy provisions for bad loans and written down investment losses. The financial market has suffered heavy losses, plunging 72 per cent over the past.

The government has been very active in taking several efforts to avoid any crisis situation. In September 2008 the central bank had injected Dh50 billion into the banking system to boost liquidity

. In October, the federal government guaranteed bank deposits and added another Dh70 billion into the banking system. In January, the Central Bank of the U.A.ECentral Bank of the U.A.E. had reduced its repo rate by 50 basis points to 1% to further reduce the cost of the liquidity supporting facilities implemented by the Central Bank to support banks.

Government of Dubai has also announced that will run a budget deficit of Dh4.2 billion this year to boost government spending to stoke economic growth. In spite of all the efforts however, the global credit crisis has put the economy in a hammerlock between evaporating credit to refinance debt and falling revenues as international trade and economic growth grind to a halt. It is against this background that Government of Dubai has launched a $20 billion long-term bond program in an effort to cover loans that financed its aggressive development strategy.

This bond sale is a way for Dubai to raise money at a cheap rate and provide government with the necessary funds to substitute the liquidity that has dried up globally to meet all upcoming financial obligations. The five-year period of the bond means that the crisis will long be over before the bond matures

. The long-term bond program is being viewed as just the stimulus needed for confidence to return to the economy. The value of the bonds is certainly big to meet all the immediate debt obligations, complete development projects, ease the tight liquidity situation in the economy and particularly help build market confidence. It is almost certain to buoy financial markets and put a floor under local and international investor confidence. The bond will give government entities access to the funds to meet the commitment of finishing all infrastructure projects and boost government spending and clear the way for more focus on some of the stimulus programs. The issue will serve as a springboard for the acceleration of economic activity and restoring global confidence in the overall economic stability and growth outlook of the emirate. With the Central Bank loans cementing federal support for its debt, Dubai and its companies, will also be able to renegotiate its debts at much more competitive rates. The purchase of the bond also adds to the array of tools the U.A.E. Central Bank can use to control monetary policy in a country that pegs its currency to the U.S. dollar, constraining its ability to intervene with the markets. The Central Bank can now buy and sell government securities to the banking system to control money supply and manage liquidity.

 It will initiate open market operations in terms of the selling and purchase of government bonds and facilitate setting up of a market for government bonds and sukuk. In a time when as a result of the global financial crisis, international capital and debt markets are closed and yields are increasing at a high rate restricting access to these markets, developing local capital and debt markets is a very significant step

Both credit and equity markets have reacted positively to the news. Dubai's benchmark stock index, which suffered a 72 percent plunge last year, advanced 8 percent on the back of the bond issue(refer to fig.1). The cost of insuring Dubai's debt in the credit default swaps market also fell up to 200 basis points following the issue which is also bound to lower risk premium on Dubai banks.

While Dubai's economy might still see some slowdown this year with tight conditions in the credit markets and weak export markets, the bond issue is a crucial step to put a floor under the near-term downturn and help to engineer a soft landing. There are also expectations of further policy actions to ease liquidity and help the economy. Investors are particularly expecting more directed funding to support Dubai's property and financial sector.

In financial capitals all over the world, a reconsideration of risk and new thinking about policies will prove critical to a sustained recovery. Dubai for its part has always thrived from its ability to adapt. The bond offering is an example of how the nation's fiscal and monetary policies are maturing to mitigate and manage the nation's exposure to the risks of a global economy..