The GCC debt capital market (DCM) issuances will continue to rise through 2024 and 2025 to hit $1 trillion outstanding while the UAE’s share is forecast to cross $300 billion in 2024-2025.
The region’s DCM saw a 7.0 per cent increase to $940 billion by the end of Q1 2024, according to Fitch Ratings, which expects the growth to be slower in the remaining quarters this year.
Potentially lower oil prices, high interest rates and initiatives to develop the debt capital markets will drive growth in issuances this year. Four out of six GCC sovereigns are investment-grade and all have a stable outlook. In the last 15 months, Fitch also upgraded Saudi Arabia, Qatar and Oman’s ratings.
“Most GCC countries have come a long way in developing their DCMs, with the bloc now accounting for almost a third of total emerging-market dollar issuance, excluding China,” said Bashar Al Natoor, global head of Islamic finance at Fitch Ratings.
However, GCC debt capital markets are in different stages of maturity and less established than more developed regions. “In addition, the region’s corporate funding culture gravitates more toward bank loans. “More diverse and wider issuer and investor participation would support development,” said Al Natoor.
Saudi Arabia currently has the largest debt capital market share in the GCC region at 43 per cent. The UAE follows with 30 per cent. Nearly 40 per cent of the GCC debt capital market outstanding was sukuk at the end of Q1 2024, while the rest was in bonds. Fitch rates more than 70 percent of the GCC’s dollar sukuk. However, the region still faces limits with standardization and sharia complexities.
The size of the UAE’s DCM rose by 10 per cent year on year to $270 billion outstanding at end-2023. Among the GCC countries, the UAE has the largest US dollar DCM.
The UAE sukuk issuers’ credit profiles are predominantly stable, with 96.5 per cent of the sukuk being investment grade and 92 per cent on a stable outlook, with the balance on a positive outlook. “We expect the UAE DCM to continue its growth momentum on the back of capital market developments and diversification of funding. However, risks for DCM growth include rising rates and oil prices, and additionally for sukuk, AAOIFI-sharia standards adoption could add challenges,” Al Natoor said in an earlier report.
The share of sukuk and dirham issuances in the UAE’s DCM mix is also projected to rise on the government’s implementation of the Dirham Monetary Framework, issuers seeking to diversify funding, and strong investor demand, including from UAE banks that have solid liquidity. The share of dirham in the outstanding DCM mix rose to 20.5 per cent at end-2023 from 0.5 per cent in 2020, with the balance mostly in US dollars.
Fitch expects the UAE’s consolidated debt to be stable (2023–2025: 31.5 per cent; 2022: 30 per cent), but below the ‘AA’ category median (2025F: 44 per cent), reflecting its forecasts that Abu Dhabi and Dubai will refinance maturing debt, Sharjah will borrow to cover the budget deficit, and the federal government will build a yield curve. Banks and corporates are likely to diversify funding by issuing debt. The central bank is expected to continue moving interest rates in lockstep with the US Federal Reserve (2024F: 5.2 per cent).
The federal government started issuing dirham T-bonds in 2022, and only T-sukuk were issued in dirham after 2Q23. In 2023, sukuk issuance in all currencies expanded by 115 per cent yoy, while bond issuance rose more slowly, by 23.6 per cent. Among US dollar DCM issuances in 2023, sukuk had a sizeable 35 per cent share, up from 24 per cent in 2022