Core Islamic Finance Markets Are Largest EM Dollar Debt Issuers – Fitch
US dollar debt issuance from emerging markets (EMs) was resilient, and issuers from the Gulf Cooperation Council (GCC) countries, Malaysia, Indonesia and Turkiye accounted for just over half of such issuance in 1H25 (excluding China), Fitch Ratings says.
Large financing needs, diversification goals and upcoming maturities are among the key drivers. Countries viewed as relative safe havens from the US trade war, such as those in the GCC, were beneficiaries of foreign inflows in 1H25.
Market diversity via sukuk and ESG instruments is also expanding in EMs. The GCC debt capital market (DCM) crossed USD1 trillion outstanding in 1H25, when issuers from the region accounted for 35.5% of all EM dollar debt issuance.
This is likely to grow further, driven by Saudi Arabia and the UAE, and by Kuwait’s re-entry to the DCM, likely later this year.
The Saudi DCM will grow on ambitious government projects under Vision 2030, deficit funding and diversification efforts. In the UAE, budget surpluses are expected, but growth will be propelled by funding diversification and the Dirham Monetary Framework implementation.
Malaysia’s DCM issuance is likely to slow further as the government maintains efforts to reduce federal debt. In Indonesia, DCM issuance should continue over 2H25, while in Turkiye modest growth is expected.
Debt issuance in 2H25 will be supported by a lower oil price (2025F: USD70; 2026F: USD65), particularly for many OPEC members, and further interest rate declines. However, risks persist from US tariffs, geopolitical and capital market volatility, and, for sukuk, sharia-compliance complexities.
Sukuk made up most of the DCM outstanding in Saudi Arabia (61.1%) and Malaysia (59.3%) as of end-1H25, and is significant in the UAE (21.9%), Indonesia (18%), Qatar (17.8%) and others. The pricing of comparable sukuk and bonds remained highly correlated in 2024.
Fitch rates more than 70% of US dollar sukuk globally – the vast majority in EMs – with about 80% investment grade at end-1H25 and no defaults.
Sukuk demand outpaced supply, supported by Islamic banks that have adequate liquidity in most markets and that cannot invest in bonds. ESG sukuk accounted for 41% of ESG dollar debt issuance in 1H25 in EMs, with the rest in bonds.
EM liquidity conditions have improved since US tariff plans were announced in April 2025.
In 1H25, EM dollar debt issuance exceeded USD250 billion (excluding China), with issuers from Saudi Arabia leading (18.9%), followed by those from Brazil (10.6%), the UAE (8.7%), Mexico (7%), Turkiye (6.7%), Indonesia (6.4%), Malaysia (4.1%) and Qatar (3.2%). Sukuk was 13.7% of all EM dollar issuances in 1H25 (2024: 12%).
Fitch considers that geopolitical risks in the Middle East remain high, and a resumption of military activity is possible. However, the DCMs were resilient to the conflict in June.
There is renewed foreign investor interest in EMs, which we believe reflects a desire to diversify away from concentration in US assets given trade war uncertainties and the effects of a weaker dollar.
Among the core Islamic finance markets, foreign investor ownership of domestic government debt is highest in Malaysia (1H25: 21.8%), followed by Indonesia (2024: 14.5%), Turkiye (3M25: 8.6%) and Saudi Arabia (1H25: 7.7%).
Inclusion of the GCC countries, Malaysia, Indonesia and Turkiye in global bond indices has also increased foreign investor demand. In the J.P. Morgan Government Bond Index-Emerging Markets, the collective share of Indonesia, Malaysia and Turkiye reached 21.4% at end-1H25.
Saudi Arabian sukuk are on the radar for inclusion in this index, while the UAE’s status for the Emerging Market Bond Index is under review for 2026.
In terms of outstanding volumes, EM dollar debt (excluding China) reached USD2.5 trillion at end-1H25, with Mexico leading (11.3%), closely followed by Saudi Arabia (10.1%) and the UAE (8.7%).
