Abu Dhabi and the UAE federal government plan to issue over $8 billion in local currency debt this year to help establish a domestic yield curve, according to a new report.

S&P Global Ratings predicts that Abu Dhabi is preparing to issue local currency debt as part of a broader effort to develop the UAE's domestic debt capital markets.

The report forecasts that the individual emirates and the UAE federal government will issue around $18 billion in local currency debt in 2025, slightly down from $19 billion in 2024. Around 55% of this debt will be used for refinancing or rolling over maturing debt.

Among the three emirates S&P Global Ratings monitors, Abu Dhabi, Ras Al Khaimah, and Sharjah, the agency anticipates that only Sharjah will issue debt to address a fiscal shortfall, with its deficit expected to reach 6.3% of GDP in 2025. The other emirates are expected to maintain a surplus, Middle East Economy reports.

The UAE's domestic debt capital market is still in its early stages, particularly in terms of local currency issuance, but it is growing.

Since the UAE federal government began issuing debt in 2021, it has raised approximately AED 27 billion ($7.3 billion) through treasury bonds and sukuk in local currency, which accounts for about 42% of total issuances.

In addition, Sharjah also issued AED 1 billion in long-term local currency sukuk in July 2024 and reissued its AED 7 billion short-term sukuk certificate in May 2024. However, the majority of debt issued by the emirates and the federal government remains in US Dollars and is held externally.

The UAE's banks are positioned to provide funding if capital markets become unfavourable, the report adds. Over the past three years, banks have significantly increased deposits and maintain healthy loan-to-deposit ratios, which should support robust lending growth in 2025.

In the worst-case scenario of limited access to capital markets and potential bank stress, S&P Global Ratings expects the UAE federal government, with backing from Abu Dhabi, to offer exceptional support to the emirates.

Furthermore, more frequent local currency issuances by Abu Dhabi and the UAE federal government are expected to contribute to the development of a domestic yield curve.

This would aid in pricing future issuances by banks and corporates, improve access to capital markets for smaller issuers, and help diversify funding sources.

However, S&P Global Ratings anticipates that, in the near term, corporates will continue to rely primarily on bank financing and access to international capital markets as their main sources of funding.