Gulf Debt Market Surges to $1 Trillion Milestone

The Gulf Cooperation Council (GCC) debt capital market has reached a significant milestone, with outstanding debt surpassing $1 trillion by the end of November 2024. This achievement marks an 11% year-on-year growth, with approximately 40% of the total debt comprising sukuk, or Islamic bonds.

Saudi Arabia leads the region’s debt capital market, followed by the United Arab Emirates and Qatar. In September, Fitch projected that Saudi Arabia’s debt capital market would exceed $500 billion in outstanding debt, driven by the financing needs for mega-projects under the Kingdom’s Vision 2030 and its broader economic diversification strategy.

Bashar Al-Natoor, Global Head of Islamic Finance at Fitch Ratings, noted that the market is poised for further expansion in 2025. This growth is expected to be driven by the need to finance government projects, maturing debt, fiscal deficits, diversification goals, and regulatory reforms. Fitch rates around 70% of GCC US dollar sukuk, 81% of which are investment-grade, with no defaults reported.

Oil revenues continue to be a significant driver of GCC debt capital market activity. Fitch anticipates that sovereign issuances will rise as oil prices decline, with forecasts of $70 per barrel in 2025 and $65 per barrel in 2026. This expectation is based on modestly rising demand and ample global supply. Additionally, GCC banks and corporations are likely to diversify their funding sources through debt capital markets, although this is not expected to be their primary funding avenue.

The development of debt capital markets within the GCC is uneven. Saudi Arabia and the UAE have the most developed markets, followed by Qatar, Bahrain, and Oman, with Kuwait being the least mature. The new government in Kuwait aims to update liquidity laws to permit borrowing in capital markets, but the timeline for these reforms remains uncertain. Recent GCC fund passporting regulations could open new investment opportunities across the region.

Fitch also highlights the growth of Environmental, Social, and Governance (ESG) debt in the region, which has reached $48 billion outstanding, with 42% in the form of sukuk. This reflects a growing commitment to sustainable finance within the GCC.

However, potential risks could impact the growth trajectory of the GCC debt capital market. Geopolitical instability in the Middle East poses a significant threat; any escalation in regional conflicts could hinder market expansion. Despite these challenges, four out of six GCC sovereigns maintain investment-grade ratings with stable outlooks.

Sharia compliance complexities, particularly those related to AAOIFI Standard 62, could also pose risks for sukuk issuance. This standard governs the structure of Islamic finance transactions, covering issues such as Shariah-compliant issuance requirements, asset backing, ownership transfers, investment structures, and trading procedures.