The Gulf Cooperation Council (GCC) has experienced significant growth in its debt capital markets, with a year-on-year increase of 11% in total debt issuance, reaching an impressive $1 trillion between January and November 2024. This surge underscores the region’s robust financial strategies and emerging prominence in global debt markets.

Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings, highlighted the factors driving this growth, predicting further expansion in 2025 as the region remains a leader among emerging-market dollar debt issuers and the largest sukuk issuers globally.

Breakdown of GCC Debt Issuance

Sukuk as a Key Driver

Approximately 40% of the GCC’s debt issuance in 2024 came through sukuk, cementing the region’s dominance in Islamic finance. Fitch Ratings underscores that the market is supported by strong fundamentals, including financing government-led projects, maturing debt obligations, fiscal deficits, economic diversification initiatives, and regulatory reforms.

Investment-Grade Ratings

Fitch rates around 70% of GCC US dollar sukuk, with 81% classified as investment-grade and no defaults reported. This reflects the strength and stability of the region’s Islamic financial instruments, making them attractive to global investors seeking Sharia-compliant investment opportunities.

Economic Drivers of Debt Market Growth

Oil Revenues and Fiscal Strategies

Oil revenues remain a cornerstone of the GCC’s economic stability and a significant factor in its debt market activity. However, sovereign issuances are projected to rise in response to anticipated declines in oil prices, which are forecast to average $70 per barrel in 2025 and $65 per barrel in 2026. This strategic shift underscores the GCC’s proactive approach to mitigating the impact of oil price fluctuations on fiscal balances.

Monetary Policy Adjustments

With Fitch predicting a 125-basis-point reduction in US Federal Reserve rates to 3.5% by Q4 2025, GCC central banks are expected to follow suit. Lower interest rates would create a more favorable funding environment, encouraging further issuances in both conventional and Islamic debt markets.

Challenges Facing GCC Debt Markets

Geopolitical Uncertainty

The ongoing Middle East conflict remains a significant variable. Any escalation could dampen investor confidence and potentially hinder growth in the debt capital market.

Sharia Compliance Complexities

Sharia compliance, particularly related to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Standard 62, presents challenges for sukuk structuring and issuance. Adapting to these evolving standards will be crucial for maintaining the market’s momentum.

Market Fragmentation

The GCC debt market remains unevenly developed across member states. While Saudi Arabia and the UAE boast the most advanced markets, Qatar, Bahrain, and Oman are progressing steadily. Kuwait, on the other hand, lags behind due to regulatory constraints. The Kuwaiti government’s proposed updates to the liquidity law aim to permit borrowing in capital markets, but timelines for these reforms remain uncertain.

Potential Catalysts for Future Growth

GCC Fund Passporting Regulations

The introduction of GCC-wide fund passporting regulations could significantly enhance regional debt market investments. By simplifying cross-border investments within the GCC, these regulations could attract institutional investors and provide issuers with a broader investor base.

Infrastructure and Diversification Projects

Mega-projects aligned with Vision 2030 strategies in Saudi Arabia and similar initiatives across other GCC states are creating substantial financing needs. The use of sukuk and conventional bonds to fund these projects is expected to increase, driving debt market activity further.

Green Sukuk and Sustainability Bonds

As global demand for sustainable financing grows, GCC issuers are increasingly turning to green sukuk and sustainability-linked bonds. These instruments align with global environmental, social, and governance (ESG) standards and offer a unique opportunity for the region to attract ESG-focused investors.

Regional Highlights

Saudi Arabia and UAE

Saudi Arabia and the UAE lead the GCC in debt market sophistication, leveraging their advanced financial infrastructures to attract international and regional investors. Key sectors driving issuances include energy, real estate, and technology.

Qatar, Bahrain, and Oman

These countries have made significant strides in developing their debt markets, with a focus on diversifying funding sources. Bahrain’s emphasis on sukuk issuance and Oman’s investment in infrastructure projects are notable contributors to their growth trajectories.

Kuwait

Despite being the least mature in the region, Kuwait is working to modernize its financial framework. Proposed legislative changes could pave the way for greater participation in capital markets, unlocking new growth opportunities.

Islamic Finance as a Cornerstone

Global Leadership in Sukuk

The GCC’s dominance in sukuk issuance positions it as a global leader in Islamic finance. With robust investment-grade ratings and a track record of zero defaults, the region continues to set benchmarks for Sharia-compliant financial instruments.

Innovative Products and Standards

As demand for Islamic finance grows, GCC issuers are exploring innovative sukuk structures and aligning with international standards. These efforts aim to address Sharia compliance complexities and enhance market transparency.

Future Outlook

The GCC debt capital market is poised for continued growth in 2025 and beyond, supported by a combination of strong economic fundamentals, proactive fiscal policies, and innovative financial instruments. Key areas of focus will include:

1. Enhanced Regional Integration: Streamlining regulatory frameworks and promoting cross-border investments within the GCC.
2. Sustainability Initiatives: Expanding green and ESG-compliant financial instruments to attract a broader investor base.
3. Technological Advancements: Leveraging fintech solutions to improve market accessibility and operational efficiency.

With its unique blend of economic resilience and strategic foresight, the GCC is set to remain a cornerstone of emerging-market debt issuance, solidifying its role in the global financial landscape.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

20^th December, 2024