According to Fitch Ratings, the debt capital market (DCM) of the UAE, the second-largest in the Gulf Cooperation Council (GCC), is projected to grow to $350 billion by 2026.
Although the market is grounded in solid fundamentals, it is currently facing challenges due to global economic fluctuations, including recent increases in US tariffs. By the end of the first quarter of 2025, the UAE’s DCM was valued at $309 billion, marking an 8.3 percent increase compared to the previous year, fueled by strong issuance activities and efforts towards diversification.
During the first quarter of 2025, DCM issuance across all currencies soared by 109 percent year-on-year to reach $29.1 billion, although this represented a 35 percent drop from the previous quarter of 2024. Debt in US dollars accounted for 68.5 percent of the total outstanding amount, reflecting the UAE’s dependence on the US currency for its borrowing instruments.
The UAE holds the position of the fourth-largest issuer of dollar-denominated debt in emerging markets (EM), excluding China, contributing 7.0 percent of EM dollar debt issuance, following Saudi Arabia, Brazil, and Mexico.
Several factors are bolstering the growth of the UAE’s DCM, including the diversification of funding sources, upcoming debt maturities, financial support for infrastructure projects, regulatory changes, and the expansion of the Islamic finance sector. The Dirham Monetary Framework plays a crucial role in providing liquidity, thereby enhancing market stability.
Nevertheless, the uncertainties in the global market, particularly the tariff increases announced by the US government on April 2, 2025, have posed challenges. The primary market has remained relatively quiet since that announcement, indicating a cautious approach from investors.
Fitch Ratings has pointed out that while the new US tariffs are not expected to have a direct impact on the UAE’s sovereign credit status, there could be indirect consequences stemming from reduced global demand that may negatively affect hydrocarbon prices.
As a result of these considerations, Fitch has revised its Brent crude oil price projection for 2025 down to $65 per barrel from $70, a change likely to encourage increased DCM operations as the UAE seeks to counterbalance revenue challenges. Banks and corporations in the UAE are anticipated to continue diversifying their funding strategies through sukuk and bond offerings, with banks acting in both capacities as issuers and key investors.
When it comes to sukuk, the UAE remains a prominent player, holding 6.5 percent of the global sukuk outstanding as of the first quarter of 2025. Nasdaq Dubai has been a leading listing venue for dollar sukuk, and data from the UAE Central Bank shows that Islamic banks facilitated almost 20 percent of global dollar sukuk issuances from 2023 to 2024.
By the end of the first quarter, sukuk made up 18 percent of the total DCM outstanding, a slight decline from 19 percent a year earlier, but accounted for nearly 50 percent of dollar-denominated issuance in that same timeframe, up from 40 percent in the first quarter of 2024. Sukuk issuance across all denominations increased by 22.6 percent year-on-year to reach $4.9 billion, while bond issuance skyrocketed by 145 percent.
Fitch rated $28 billion worth of UAE sukuk, with 92.1 percent classified as investment grade: 39.2 percent in the ‘A’ category, 34.5 percent in ‘BBB,’ 18.4 percent in ‘AA,’ 6.3 percent in ‘BB,’ and 1.6 percent in ‘B.’ All sukuk issuers maintain a Stable Outlook, and there have been no defaults on rated sukuk or bonds in 2024 or the first quarter of 2025. The dirham’s share in the DCM climbed to 24.9 percent by the end of the first quarter, a significant rise from just 0.5 percent in 2020. The federal government is prioritizing dirham Treasury sukuk over bonds, although there are still limited Islamic alternatives to dirham treasury bills (M-bills).
To bridge this gap, the UAE Central Bank is initiating a Sustainable Islamic M-Bills program, which will enable issuances to serve as collateral for liquidity facilities.
Outstanding environmental, social, and governance (ESG) debt has reached $25 billion, reflecting a 30 percent increase year-on-year, with sukuk making up over 40 percent of this total. However, ESG debt issuance fell by 40.7 percent in the first quarter to $1.2 billion, all of which was in sukuk form, with no ESG bonds released. Despite its strengths, the DCM in the UAE faces challenges from a concentrated investor base, primarily consisting of banks, and complexities around Sharia compliance, including matters related to AAOIFI Standard 62. Nonetheless, the market’s fundamental strengths position it for sustained growth, even amid ongoing global uncertainties.