Abu Dhabi and the UAE federal government will issue more than $8 billion of local currency debt this year to support the establishment of a domestic yield curve, a new report suggests.
S&P Global Ratings anticipated anticipated that Abu Dhabi is preparing to issue local currency debt as part of an ongoing initiative to develop the UAE domestic debt capital markets.
Overall, S&P Global Ratings expects individual emirates and the UAE federal government to issue approximately $18 billion of local currency debt in 2025, slightly down from $19 billion in 2024. About 55 percent of that will be used for refinancing or to roll over maturing debt. Of the three emirates S&P Global Ratings rates – Abu Dhabi, Ras Al Khaimah, and Sharjah – S&P Global Ratings expects that only Sharjah will issue debt to meet a fiscal shortfall (S&P Global Ratings estimates its deficit will be 6.3 percent of GDP in 2025), while the others will maintain their surplus position.
The UAE’s domestic debt capital market remains relatively nascent, particularly with regards to local currency issuance, but it is growing. Since the UAE federal government began raising debt in 2021, it has issued about AED27 billion ($7.3 billion) of treasury bonds and sukuk in local currency, equating to about 42 percent of total issuances. Sharjah also issued AED1 billion of long-term local currency sukuk in July 2024 and reissued its AED7 billion short-term sukuk certificate in May 2024. However, most of the emirates and federal government debt remains denominated in U.S. dollars and is held externally.
Read more: UAE banks’ capital, reserves reach $134.8 billion by June 2024, says Central Bank
Banks as potential funding sources
Capital markets are volatile in an uncertain global environment, and reliance on international capital markets could expose some issuers to higher borrowing costs. Sharjah is particularly exposed in this regard, the agency reported. Its fiscal deficits will likely remain large, net government debt is about 50 percent of GDP, and its interest burden is around 30 percent of government revenues, one of the highest among S&P Global Ratings’ rated sovereigns. S&P Global Ratings notes, however, that Sharjah’s recent sukuk issuances were well received by the market.
The UAE’s well-capitalized and liquid banks could provide funding should capital markets prove unsupportive. Banks have notably increased deposits over the past three years and continue to display comfortable loan-to-deposit ratios that should support strong lending growth in 2025. In a worst-case scenario of impaired access to capital markets and bank stress, S&P Global Ratings expects the UAE federal government, backed by Abu Dhabi, would provide extraordinary support to the emirates.
Prudent fiscal policies and balance sheets
Despite lower oil prices, most of the emirates will maintain prudent fiscal policies and strong balance sheets. Much of the debt issuance is therefore likely to be opportunistic and market dependent. For example, S&P Global Ratings expects that Abu Dhabi could choose to repay some of its about $6 billion of debt maturing this year. Dubai also continues to deleverage–the government repaid $1.2 billion during the first three months of the year. Dubai could however issue more debt from 2026 to fund the expansion of the Al Maktoum International Airport and the renovation of the rainwater drainage network. Ras Al Khaimah issued a $1 billion 10-year sukuk in March to refinance the same amount maturing that month. There are large upcoming tourism-related projects in the emirate, but S&P Global Ratings anticipates that these will be mostly funded by government-related entities (GREs), with contingent liabilities of the government remaining manageable.
More regular domestic currency issuances by Abu Dhabi and the UAE federal government will help to build a domestic yield curve. This could be used in the pricing of issuance by banks and corporates and help smaller issuers access the capital markets, while diversifying the funding base. That said, S&P Global Ratings expects bank funding along with the access to international capital markets to remain the core funding sources for corporates in the near term.
