Half of all emerging-market debt issued by core Islamic finance markets

Trend expected to continue in 2024–2025

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Published: Thu 27 Jun 2024, 3:52 PM

Last updated: Thu 27 Jun 2024, 3:53 PM

GCC countries, Malaysia, Indonesia, and Turkiye are increasingly major emerging-market (EM) debt issuers, Fitch Ratings says.

In the first five months of 2024, they accounted for 51 per cent of all US dollar debt issued by EMs (excluding China; 2023: 43.7 per cent; 2020: 32.8 per cent). “We expect this growth to continue in 2024–2025, driven by government initiatives to develop the debt capital markets (DCM), diversify funding, finance fiscal deficits, government projects, and maturing debts. Sukuk is also maturing as a key funding and policy tool, accounting for 12.4 per cent of all EM dollar debt issued so far in 2024 (excluding China; 2023: 15 per cent; 2017: 5 per cent),” the ratings agency said in a commentary.

In the first quarter of 2024, the GCC DCM grew by seven per cent to reach $940 billion outstanding.

Saudi Arabia Holds the largest debt capital market share in the GCC region with 43 per cent. The UAE follows closely with 30 per cent of the market share. Nearly 40 per cent of the GCC DCM outstanding was in sukuk (Islamic bonds), while the rest was in conventional bonds.

Saudi Arabia holds the largest debt capital market share in the GCC region with 43 per cent. The UAE follows closely with 30 per cent of the market share. Nearly 40 per cent of the GCC DCM outstanding was in sukuk (Islamic bonds), while the rest was in conventional bonds. Fitch data shows that more than a third of GCC debt issued last year was in the form of sukuk, Approximately 40 per cent of the Gulf Cooperation Council (GCC) debt capital market (DCM) outstanding in the first quarter of 2024 was in sukuk (Islamic bonds). This translates to an estimated value of around $376 billion.

EM dollar debt issuance (excluding China) exceeded $200 billion in the first five months of 2024, with issuers from Saudi Arabia issuing the most debt (18.5 per cent), followed by Argentina (9.1 per cent), the UAE (nine per cent), Brazil (8.5 per cent), Turkiye (7.8 per cent), Indonesia (5.7 per cent), Mexico (5.2 per cent), and Chile (3.8 per cent).

The inclusion of the GCC, Malaysia, Turkiye, and Indonesia in global bond indices supports dollar bond demand from international investors. Fitch has upgraded the ratings of Saudi Arabia, Turkiye, Qatar and Oman over the past 15 months. Expectations of falling interest rates are likely to support investor demand for higher-yielding debt. For sukuk, demand is supported by Islamic banks, which cannot invest in bonds.

Sukuk makes up the majority of domestic DCM issuance (all currencies) in Malaysia (2023: 60 per cent), Saudi Arabia (56 per cent), and Indonesia (55.3 per cent), and is also significant in some other countries. Most Fitch-rated sukuk create an economic effect similar to bonds, are senior unsecured obligations of the issuer, and rank pari passu with other senior unsecured obligations. Sukuk and comparable bonds were priced at similar levels in 2023. Fitch rates above 70 per cent of US dollar sukuk globally, with close to 80 per cent of outstanding rated sukuk being investment-grade in 1Q24.

Saudi Arabia is aiming to deepen sukuk and debt markets, with issuance driven by budget deficits. In the UAE, while surpluses are expected, issuers are seeking funding diversification. “In Indonesia, we expect DCM issuance to slow over 2024–2025, because of fiscal restraint and an assumed continued gradual fall in government debt. Indonesia has the largest share of DCM in the ASEAN (end-2023: 24 per cent outstanding), followed by Singapore (22 per cent) and Malaysia (20 per cent),” Fitch analysts wrote.

The Malaysian government’s slightly expansionary 2024 budget will drive DCM growth, with the authorities planning several development initiatives guided by the Ekonomi MADANI framework. In Turkiye, the recent revival in foreign-currency debt issuances signals lower near-term refinancing risks due to improved investor sentiment since Turkiye’s adoption of more conventional macroeconomic policies.

Outstanding EM dollar debt (excluding China) reached $2.3 trillion at end-May 2024, with Mexico having the majority (11.4 per cent), followed by Argentina (8.5 per cent), the UAE (8.5 per cent), Saudi Arabia (8.4 per cent), Brazil (7.9 per cent), Turkiye (5.7 per cent), Indonesia (5.7 per cent), Chile (4.2 per cent), and Qatar (3.5 per cent). Across all currencies, 16.5 per cent of all debt in EMs (excluding China) were issued by the GCC, Malaysia, Indonesia, and Turkiye in 5M24. Sukuk was 5.2 per cent of all EM debt issued year-to-date in 2024.

In the JPMorgan Corporate Emerging Markets Bond Index, the GCC, Kuwait, Indonesia, Malaysia and Turkiye collectively had 23.2 per cent market capitalisation in May 2024. However, the index does not include sovereigns, who are key issuers in these countries.

Moreover, only sukuk compliant with the AAOIFI sharia standards and guidelines issued by the Higher Sharia Authority of the UAE central bank will be included in the JPMorgan Global IG Sukuk Index as of end-May 2024, the agency noted.