UAE's debt capital market on track to hit $350b by 2026 despite headwinds
The UAE's debt capital market (DCM), the second-largest in the GCC, is on track to reach $350 billion by 2026, according to Fitch Ratings.
Despite robust fundamentals, the market faces headwinds from global economic volatilities, including recent US tariff hikes. The UAE's DCM, valued at $309 billion by the end of the first quarter of 2025, grew 8.3 per cent year-on-year, driven by strong issuance and diversification efforts.
In the first quarter of 2025, all-currency DCM issuance surged 109 per cent year-on-year to $29.1 billion, though it declined 35 per cent from the fourth quarter of 2024. Dollar-denominated debt accounted for 68.5 per cent of the outstanding total, underscoring the UAE's reliance on US currency for its debt instruments.
The UAE ranked as the fourth-largest emerging market (EM) issuer of dollar-denominated debt, excluding China, contributing 7.0 per cent of EM dollar debt issuance, trailing Saudi Arabia, Brazil, and Mexico.
The UAE's DCM growth is supported by several factors, including funding diversification, upcoming debt maturities, infrastructure financing, regulatory reforms, and the development of the Islamic finance ecosystem. The Dirham Monetary Framework continues to provide critical liquidity, bolstering market stability.
However, global uncertainties, particularly the US government's tariff increases announced on April 2, 2025, have introduced challenges. The primary market has been relatively subdued since the announcement, reflecting investor caution.
Fitch Ratings notes that while the US tariffs are unlikely to directly impact the UAE's sovereign credit profile, indirect effects could arise from weakened global demand, potentially depressing hydrocarbon prices.
Fitch recently lowered its Brent crude oil price forecast for 2025 to $65 per barrel from $70, a move that could spur increased DCM activity as the UAE seeks to offset revenue pressures. UAE banks and corporates are expected to continue diversifying funding through sukuk and bond issuances, with banks playing a dual role as both issuers and key investors.
The UAE remains a global leader in sukuk, holding 6.5 per cent of outstanding global sukuk as of the first quarter of 2025. Nasdaq Dubai is a top listing center for dollar sukuk, and UAE Islamic banks facilitated nearly 20 per cent of global dollar sukuk issuances in 2023-2024, according to the UAE Central Bank.
Sukuk comprised 18 per cent of DCM outstanding by the end of the first quarter, down slightly from 19 per cent a year earlier, but accounted for nearly 50 per cent of dollar-denominated issuance in the same period, up from 40 per cent in the first quarter of 2024.Sukuk issuance in all currencies grew 22.6 per cent year-on-year to $4.9 billion, while bond issuance soared 145 per cent.
Fitch rated $28 billion of UAE sukuk, with 92.1 per cent classified as investment grade—39.2 per cent in the 'A' category, 34.5 per cent in 'BBB,' 18.4 per cent in 'AA,' 6.3 per cent in 'BB,' and 1.6 per cent in 'B.' All sukuk issuers maintained a Stable Outlook, and no rated sukuk or bonds defaulted in 2024 or the first quarter of 2025.The dirham's share of the DCM rose to 24.9 per cent by the end of the first quarter, up significantly from 0.5 per cent in 2020. The federal government has prioritized dirham Treasury sukuk over bonds, though Islamic alternatives to dirham treasury bills (M-bills) remain limited.
The UAE Central Bank is addressing this gap by developing a Sustainable Islamic M-Bills program, which will allow issuances to serve as collateral for liquidity facilities.
Environmental, social, and governance (ESG) debt reached $25 billion outstanding, up 30 per cent year-on-year, with sukuk comprising over 40 per cent. However, ESG debt issuance in the first quarter fell 40.7 per cent to $1.2 billion, entirely in sukuk, with no ESG bonds issued. Despite its strengths, the UAE's DCM faces risks from a concentrated investor base, primarily banks, and complexities in Sharia compliance, including issues tied to AAOIFI Standard 62. Nevertheless, the market's robust fundamentals position it for continued growth, even as global uncertainties loom.
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