(Bloomberg) -- The United Arab Emirates is on a borrowing binge — and looks set to extend its debt-issuance spree well into the new year.
Companies as well as sovereign entities in the UAE — one of the highest-rated emerging markets — issued $38.4 billion of dollar debt this year. That was 54% more than last year and the most since the Covid-induced financing splurge of 2020, according to data compiled by Bloomberg. Federal and emirate-level government bonds led the charge, unlike last year when corporates were the biggest borrowers.
The UAE offers investors the best of both worlds: per capita income rivaling Group of 10 advanced nations, and an emerging-markets-like growth rate. Economic levers spanning oil, trade, finance and tourism have boosted the size of its sovereign wealth fund as well as equity market to $1 trillion each. Twin surpluses and double AA credit grades keep risk spreads at less than a fourth of the EM average.
“Issuers are taking advantage of tight spreads,” said Fady Gendy, a fixed-income money manager at Arqaam Capital Ltd. in Dubai. “The onset of the global rate-cutting cycle is supportive as well. Going into 2025, we expect a very active issuance market in the UAE given the high maturity wall that’s coming up.”
Compared with the buzz in the primary market, the secondary market has been muted. UAE dollar bonds, both corporate and sovereign, handed investors a combined return of 4% this year, marginally beating the 3.6% gain for EM investment-grade debt. But this was a year dominated by high-yield paper, with the likes of Lebanon, Argentina and Ecuador giving returns of more than 70% each, riding on idiosyncratic turnaround stories.
Even so, higher-rated new issuance remained strong as investors sought credit safety at a time when slowing economic growth and trade headwinds threaten to bring debt distress back to emerging markets. An added attraction for the UAE was that neither the federal government, nor its capital Abu Dhabi, needed to borrow as their fiscal position is strong, said Gendy. They sold bonds only to sustain a market presence and maintain the yield curve, he said.
Investors demand 77 basis points of additional yield over Treasuries to own UAE bonds, according to JPMorgan Chase & Co. That compares with a risk spread of 324 basis points for emerging markets on average.
Opportunistic Issues
The low spread means the government of Abu Dhabi will be again “opportunistic” and tap the market in 2025, Gendy said. Arqaam also expects a UAE federal issue next year, after only the fourth such eurobond ever was sold in June 2024.
Some of the other emirates have greater financing needs. The government of relatively lower-rated Sharjah is among them, Gendy said. The emirate had a fiscal deficit equal to 6% of its GDP in 2023, according to S&P Global Ratings. The credit-assessment company expects the shortfall to narrow to 3.9% by 2027, but says Sharjah may continue to see higher expenditure including debt-servicing costs.
“With its fiscal deterioration and chronic deficit, Sharjah needs to come to the market,” Gendy said.
Meanwhile, the new year will see enhanced refinancing needs as many of the securities issued at the height of the Covid pandemic in 2020 were five-year notes, he said. Arqaam projects the emirate of Ras al Khaimah to take advantage of its recent credit-rating upgrade by S&P to test the waters with a new issue.
Meanwhile, companies and banks face a tall maturity wall. In all, as much as $19.2 billion of UAE dollar debt will mature next year, according to data compiled by Bloomberg. That should keep the primary market active, especially if Federal Reserve interest-rate cuts continue to support low borrowing costs.
As for bond-price performance, the key is global monetary easing. The spike in Treasury yields even after the start of Fed cuts has led to a sharp underperformance in EM investment-grade bonds, leaving them the cheapest in six years relative to high-yield securities. Next year would bring the added challenge of US trade tariffs and inflationary spending policies by Donald Trump’s administration, Gendy said.
“Any positive performance next year would depend on developments on the rates side,” he said. “The headwinds of Trump policy combined with sizable supply on the IG side leave the scope for significant outperformance rather limited.”
--With assistance from Selcuk Gokoluk.
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