Gulf Cooperation Council (GCC) countries accounted for over 35 percent of all emerging-market (EM) U.S. dollar debt issued in the first quarter of 2025, excluding China. This represents an increase from approximately 25 percent in 2024, according to a report by Fitch Ratings.

Fitch predicts that this upward trend in GCC debt capital markets (DCMs) will likely continue throughout 2025 and 2026. The growth is expected to be driven by factors such as the need for funding diversification, project financing requirements, budget deficits, and regulatory changes. Nonetheless, the region faces challenges due to global macroeconomic and financial market uncertainties.

Since April 2, activity in the primary market dollar issuance has been relatively subdued. However, recent developments suggest that a strong pipeline is beginning to form. Liquidity among regional and Islamic investors remains robust.

The dynamics of the GCC DCM exhibit fragmentation among its member countries regarding maturity, depth, and credit profiles. Saudi Arabia and the UAE are identified as the most developed markets. In contrast, Kuwait, Qatar, Bahrain, and Oman struggle with limited connections to international central securities depositories, which hampers foreign investor participation in local-currency DCMs. As a result, foreign investors in Saudi Arabia accounted for 7.7 percent of the investor base in government local issuances by the end of Q1 2025, an increase from 4.5 percent in 2024.

Oil price volatility poses significant challenges for fiscal revenues in the GCC. Factors such as U.S. tariff-related volatility and OPEC+ production cuts are exerting downward pressure on oil prices, which are forecasted at $65 per barrel for 2025 and 2026. This situation may lead to increased borrowing through the DCM. While Bahrain and Saudi Arabia’s public finances are more sensitive to lower oil prices, Oman is better positioned, and Qatar, Abu Dhabi, and Kuwait have substantial assets to withstand prolonged declines in oil prices. Fitch also projects that U.S. Federal Reserve interest rates will decrease to 4.25 percent by the end of 2025, which is expected to influence GCC central banks similarly.

As of the end of Q1 2025, the size of the GCC DCM exceeded $1 trillion across all currencies, reflecting a 10 percent year-on-year increase. Various issuers, including sovereigns, corporates, and financial institutions, accessed the market. Total DCM issuance in Q1 2025 grew by 11 percent over the quarter to $89 billion, although it was down 3 percent year-on-year. Saudi Arabia holds the largest share of DCM outstanding at 45.1 percent, followed by the UAE at 29.9 percent and Qatar at 13 percent.

GCC countries also represent over 40 percent of the global sukuk market. As of Q1 2025, sukuk accounted for around 40 percent of the GCC DCM, with the remaining share in bonds. However, GCC sukuk issuance fell by 51 percent year-on-year in Q1 2025 to $18.2 billion, while bond issuance saw a 29 percent increase. The ESG DCM in GCC countries surpassed $50 billion across all currencies as of Q1 2025.

Approximately 83.5 percent of the GCC U.S. dollar sukuk publicly rated by Fitch are classified as investment-grade. Among these, 57.8 percent fall within the ‘A’ category, while 13.5 percent belong to the ‘AAA’ category. Most issuers maintain Stable Outlooks, with 85.5 percent, whereas Positive and Negative Outlooks represent 5.4 percent and 9.1 percent, respectively. Notably, Bahrain’s Outlook was changed to ‘Negative’ from ‘Stable’ in February 2025, but no Fitch-rated GCC sukuk or bond defaulted in 2024 or Q1 2025.

In Kuwait, the Council of Ministers has approved a long-delayed financing and liquidity law aimed at enhancing fiscal financing flexibility, potentially leading to a rise in government debt. Meanwhile, in the UAE, the government is advancing the Dirham Monetary Framework, with the dirham’s share in the UAE DCM increasing to 24.9 percent at the end of Q1 2025, compared to just 0.5 percent in 2020. The UAE Central Bank has also initiated the development of a Sustainable Islamic M-Bills program, while the Qatar Central Bank has issued a Sustainable Finance Framework.