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UAE’s outstanding debt capital market rose 10% last year

Deepening pool, rising maturity, sukuk and dirham share to rise

The size of UAE outstanding debt capital market (DCM) rose 10 per cent year-on-year, a new report showed.

According to Fitch Ratings’ UAE Debt Capital Markets Dashboard: 2024, the figure rose to $270 billion for all currencies at end-2023, with 71.4 per cent in US dollars (2020: 87.5 per cent) and 20.5 per cent in dirham.

(2020: 0.5 per cent). Among US dollar DCM issuances, sukuk was a sizeable 35 per cent, up from 24 per cent in 2022.

For DCM issuance across all currencies, sukuk had an 8.7 per cent share which, while lower than US dollar issuance, is rising due to multiple dirham issuances (2022: 5.2 per cent).

In 2023, sukuk issuance in all currencies jumped by 115 per cent year-on-year ($12.7 billion), while bond issuance was slower, rising 23.6 per cent year-on-year ($132.9 billion). The federal government started issuing dirham T-bonds in 2022, and shifted to T-sukuk after Q2 2023. Fitch rates $22.7 billion of UAE sukuk, 96.5 per cent of which is investment grade (2022: 91 per cent). “About 8 per cent of sukuk issuers have a Positive Outlook (2022: 28.7 per cent), 92 per cent have a Stable Outlook (2022: 71.2 per cent), and no sukuk has defaulted,” the report, written by Bashar Al Natoor, Global Head - Islamic Finance, and Saif Shawqi, Associate Director - Islamic Finance, said.

The UAE’s debt-to-GDP ratio will remain close to 32 per cent in 2023-2025, below the ‘AA’ category median. This reflects a large surplus in Abu Dhabi, stable debt in Dubai and Ras Al Khaimah, rising debt in Sharjah to fund the budget deficit, and continued borrowing by the federal government to build the yield curve and to seed the Emirates Investment Authority. Fitch expects the central bank to continue moving rates in lockstep with US Federal Reserve (2024F: 4.75 per cent).

“UAE banks are important debt investors, with their investment portfolios rising 21.7 per cent year-on-year as of the first nine months of 2023 to $163.6 billion, or 15 per cent of total assets. The funding and liquidity profile of the banking system is solid, supported by deposit growth (11.4 per cent year-on-year) outpacing loan growth (5.1 per cent),” the report said.

The UAE had the largest US dollar DCM in the Gulf Cooperation Council (GCC) at end-2023 with 37 per cent outstanding. Under all currencies, the UAE is second to Saudi Arabia, with respective 30.5 per cent and 16 per cent shares in the total GCC DCM and sukuk markets. UAE entities are key sukuk issuers (22.5 per cent of global US dollar sukuk), investors and arrangers.

Outstanding UAE ESG debt rose 165 per cent year-on-year ($17.1 billion) with 40.2 per cent in sukuk format. The Higher Sharia Authority directed Islamic banks and windows to establish separate sustainable businesses and activities within the existing business lines that include sustainable sukuk issuances and financing. The Dubai Financial Services Authority waived regulatory fees on ESG listings on Nasdaq Dubai for 2024. “These initiatives could help boost ESG debt issuance in the near term,” the Fitch report said.

Fitch expects DCM to reach $300 billion outstanding in 2024-2025, and sukuk to continue being a growing part of UAE’s funding mix, on the back of the government implementing the Dirham Monetary Framework, issuers seeking to diversify funding, and strong investor demand. Nasdaq Dubai is expected to continue being one of the top listing centres for US dollar sukuk globally, giving the UAE a competitive edge. Risks for DCM growth include rising rates and oil prices, and additionally for sukuk, AAOIFI-Sharia standards adoption issues.