The deep dive: UAE debt capital market

By Puja Sharma

The deep dive’ is our bi-weekly exploration of a relevant topic, hot trend, or new product. For Prime subscribers only.

How does it work?

UAE debt capital market maturity rising; exceeds $250bn: This follows issuers funding diversification goals, and government initiatives to develop the DCM, implement the Dirham Monetary Framework, and build the domestic yield curve.

The maturity of the UAE debt capital market (DCM) is rising. Its outstanding size crossed $250bn by end-1H23 and Fitch Ratings expects it to exceed $300bn by 2030. This follows issuers funding diversification goals, and government initiatives to develop the DCM, implement the Dirham Monetary Framework, and build the domestic yield curve.

Who is under the radar?

“The DCM in UAE is increasingly maturing – not only in terms of size, but also through diversity of issuances and currencies”, said Bashar Al-Natoor, Global Head of Islamic Finance at Fitch. “However, the local DCM still faces key challenges, such as the UAE’s corporate funding culture being geared towards bank financing. With COP28 to be held in the UAE, sustainability and ESG debt are in the spotlight.”

In 1H23, sukuk issuance in all currencies was up 52.9% yoy ($6.7bn). Bonds were up 5.7% ($60bn). Sukuk issuance recovered to 35.1% of US dollar DCM issuance at end-1H23 (end-2022: 24%); the rest were in bonds. Sukuk issuers have adapted central bank requirements to comply with AAOIFI sharia standards, introduced in 2021. The federal government has shifted from issuing Dirham T-bonds to issuing T-sukuk for May–December 2023.

Why does it matter now?

Fitch projects the UAE’s consolidated debt to be stable (2023–2025: 31.5%; 2022: 30%), but below the ‘AA’ category median (2025F: 44%), reflecting our 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 US Federal Reserve (2024F: 5.2%).

The UAE had the largest DCM in the GCC – a 36.2% share (outstanding, in US dollars only). Fitch rates $20.5bn UAE outstanding sukuk, 90.5% of which is investment-grade.