UAE’s Fiscal Deficit Widens, Even with Boost from Oil and Gas Revenue

**UAE Faces Excessive Borrowing Amid Financial Deficit, Despite Oil and Gas Windfall**

International reports have revealed that the UAE is experiencing excessive borrowing and is set to extend its debt issuance spree into the new year, with a looming maturity wall of $19 billion, as the northern Emirates grapple with a growing fiscal deficit.

Bloomberg reported that UAE companies and sovereign entities — one of the highest-rated emerging markets — issued $38.4 billion in debt this year, a 54% increase compared to last year and the largest amount since the COVID-19-driven financial surge in 2020, according to data collected by Bloomberg.

Government bonds, both federal and Emirati, have driven the cost, unlike last year when corporations were the largest borrowers.

This increase in debt issuance comes despite the UAE’s recent economic boom, driven by rising oil and gas revenues. The UAE is one of the wealthiest countries in the world, with sovereign wealth funds exceeding a trillion dollars.

The UAE’s economic sectors, including oil, trade, finance, and tourism, have helped increase the value of its sovereign fund and stock market to $1 trillion each.

With large financial surpluses at the sovereign wealth fund, liquidity in the stock market, and the UAE’s credit rating of “AA,” the country’s bond yield spreads are lower than a quarter of the emerging markets’ average.

Fadi Jundi, Head of Fixed Income at Arqaam Capital in Dubai, stated, “Issuers are taking advantage of tight spreads. The beginning of a global rate-cutting cycle is also supportive.” He added, “By 2025, we expect a very active issuance market in the UAE due to the high maturity wall coming up.”

Despite the strong activity in the primary market, the secondary market has remained quiet. UAE dollar-denominated bonds, whether corporate or sovereign, have provided investors with a 4% return this year, slightly outperforming the 3.6% return on investment-grade emerging market bonds.

However, the year has been dominated by high-yielding securities, with countries like Lebanon, Argentina, and Ecuador achieving returns exceeding 70% each, due to remarkable turnaround stories.

Still, higher-rated bonds continued to be issued strongly, as investors seek credit safety amid the economic slowdown and the threat of debt crises returning to emerging markets.

One additional appeal for the UAE is that both the federal government and its capital, Abu Dhabi, have not needed to borrow due to their strong financial positions, according to Jundi.

The UAE governments, particularly in Abu Dhabi, have resorted to issuing bonds merely to maintain their presence in the market and preserve the yield curve.

Investors demand an additional 77 basis points to purchase UAE-issued debt, according to JPMorgan Chase, compared to an extra 324 basis points for holding emerging market bonds on average over U.S. Treasury yields.

Jundi said the narrow spread means that Abu Dhabi’s government will likely “take advantage of favorable conditions” once again and re-enter the market in 2025.

Arqaam Capital also predicts that the UAE government will issue sovereign bonds next year, following its issuance of international bonds in June 2024, marking the fourth such issuance at the federal level.

Meanwhile, Jundi noted that the government of Sharjah, with a relatively lower rating, is among those likely to issue bonds. The emirate had a fiscal deficit of 6% of its GDP in 2023, according to Standard & Poor’s Global Ratings.

The credit rating agency expects the deficit to shrink to 3.9% by 2027, but it warns that Sharjah may continue to face rising expenses, including debt servicing costs.

Jundi commented, “With deteriorating finances and a chronic deficit, Sharjah will need to come to the market.”

Looking ahead, the new year will see heightened refinancing needs, as many securities issued at the peak of the COVID-19 pandemic in 2020 were five-year bonds.

Meanwhile, companies and banks are facing significant debt repayments, with UAE debt maturing at $19.2 billion in the coming year, according to Bloomberg data.

This will keep the primary market active, particularly if the Federal Reserve’s interest rate cuts continue to support low borrowing costs.

As for bond price performance, the key factor remains global monetary easing (interest rate cuts).

The rise in U.S. Treasury yields, even after the Fed began cutting interest rates, led to a sharp decline in the performance of investment-grade bonds in emerging markets, making them the cheapest compared to high-yield bonds in six years.

Observers note that the coming year will bring an additional challenge, with U.S. trade tariffs and inflationary spending policies under the Trump administration further complicating the outlook for emerging market bonds.