Today's Edition
A. SREENIVASA REDDY (ABU DHABI)
Abu Dhabi and the UAE federal government will likely issue more than $8 billion of local currency debt this year to support the development of a domestic yield curve, S&P Global Ratings said in its latest report on the global outlook for Islamic finance.
The credit rating agency noted that the move forms part of a wider effort to deepen and diversify the country’s domestic debt capital markets, which remain relatively nascent but are expanding rapidly.
According to S&P, total debt issuance by individual emirates and the UAE federal government is projected to reach about $18 billion in 2025, slightly below the $19 billion recorded in 2024. Of that amount, around 55% is expected to be allocated to refinancing or rolling over maturing debt.
Among the emirates it rates — Abu Dhabi, Ras Al Khaimah and Sharjah — S&P expects that only Sharjah will issue debt to cover a fiscal shortfall, which the agency estimates at 6.3% of GDP in 2025, while Abu Dhabi and Ras Al Khaimah are likely to maintain fiscal surpluses.
S&P said the UAE’s local currency debt market, though still in early stages, has been gaining traction since the federal government began raising funds domestically in 2021. Since then, it has issued about Dh27 billion ($7.3 billion) in treasury bonds and sukuk denominated in dirhams, representing roughly 42% of total issuances.
Sharjah has also been active in the domestic market, issuing Dh1 billion in long-term sukuk in July 2024 and reissuing its Dh7 billion short-term sukuk certificates in May 2024. Despite this progress, S&P said that most federal and emirate-level debt remains denominated in US dollars and is held by external investors.
The report said reliance on international capital markets exposes issuers to potential increases in borrowing costs, especially during periods of global market volatility. It noted that Sharjah is particularly exposed due to its higher fiscal deficits. However, S&P observed that Sharjah’s recent sukuk offerings were well received by investors, signalling continued market confidence.
Highlighting the strength of the UAE’s financial system, S&P said the country’s well-capitalised and liquid banks could provide funding support if global market conditions tighten. UAE banks have increased deposits over the past three years and maintain comfortable loan-to-deposit ratios, which will sustain strong lending growth in 2025.
“In a worst-case scenario of impaired access to capital markets or banking sector stress, we expect the UAE federal government — backed by Abu Dhabi — would provide extraordinary support to the emirates,” S&P said.
Despite lower oil prices, S&P expects most emirates to maintain prudent fiscal policies and strong balance sheets, meaning much of the anticipated debt issuance will be opportunistic and market-dependent.
Abu Dhabi, it said, may choose to repay part of its $6 billion debt maturing this year, while Dubai continues to deleverage, having repaid $1.2 billion in the first quarter of 2025. However, Dubai could return to the debt market from 2026 to finance the expansion of Al Maktoum International Airport and upgrades to its rainwater drainage network.
Meanwhile, Ras Al Khaimah issued a $1 billion 10-year sukuk in March to refinance an equivalent amount maturing that month. Although the emirate is pursuing several tourism-related projects, S&P expects most will be financed by government-related entities, keeping contingent liabilities manageable.
According to S&P, more frequent dirham-denominated bond issuances by Abu Dhabi and the federal government will be key to building a domestic yield curve, which can serve as a benchmark for banks and corporates. This would enable smaller issuers to access capital markets and diversify funding sources.
However, S&P added that bank lending and access to international capital markets will continue to be the core funding channels for UAE corporates in the near term.
