Islamic finance is today a $3.9 trillion industry spread over more than 80 countries with the bulk of it concentrated in very few markets. Comparing data from different sources shows that just 10 countries account for almost 95% of the world’s sharia compliant assets. Saudi Arabia and Iran lead the way with 25% to 30% market share each, followed by Malaysia (12%), the UAE (10%), Kuwait and Qatar (5.5%), Türkiye and Bahrain (3.5%), Indonesia and Pakistan (2%).

These countries drive the growth of Islamic finance, set industry standards and foster innovation. Over the past decade, Islamic finance grew at an exponential yearly pace of around 10%. According to the 2023 State of Global Islamic Economy report, total sharia-compliant assets will grow to $5.95 trillion by 2026 although that depends on the economic well-being of these 10 markets.

Islamic finance’s primary sphere of influence is of course the Arab world thanks to its Muslim-majority populations and abundance of petrodollars. The Middle East and North Africa (MENA, which excludes Iran) are home to over 190 Islamic banks.

The share of Islamic banking from total banking assets varies among Arab countries, with Sudan recording the highest share at 100%, followed by Saudi Arabia at 74.9%, Kuwait at 51%, Qatar at 28.6%, Djibouti at 25.0%, the UAE at 22.7%, Jordan at 17.8%, Palestine at 17.4%, Oman at 16.6%, and Bahrain at 16.1%.

The Gulf Cooperation Council (GCC) dominates the world of Islamic finance with over 97% of the top 50 Arab Islamic banks’ assets (see table below).

The region’s 15 largest Islamic banks are all GCC-based and accounted for nearly $770 billion assets in 2022. These banks sometimes branch out abroad—Bahrain’s Bank al Baraka for instance has offices in more than 15 countries. A milestone for the region was the finalization Kuwait Finance House’s acquisition of Bahrain’s Ahli United late 2022. The $8.8 billion created the second largest Islamic bank in the world with over $120 billion combined assets (see table below).

Up until recently, North African countries considered Islamic finance to be an unwelcome interference from Gulf states. Islamic banks and financial products were outlawed or strictly monitored.

Morocco allowed it last. In 2017, the regulator, Bank Al-Maghrib, allowed five Islamic banks to start operating in the kingdom. The country also issued its first Islamic bond or sukuk in 2018. By 2022, “participatory finance” as it is called there was worth $2.7 billion. Sharia-compliant lenders represented only 2% of the local banking market but their assets grew 20% year over year, a much higher growth rate than that of conventional banks.

That same year, Islamic lenders had a 5.1% market share in Tunisia and 2.4% in Algeria where Islamic banks already existed. Governments are currently working on legal frameworks to introduce sukuks and pushing for conventional banks to develop and commercialize sharia-compliant products.

Egypt, North Africa’s biggest market issued its first Islamic bond in 2023. Sharia-compliant finance grew 22% between 2022 and 2023 and represents about 4% of the local banking sector according to the Egyptian Islamic Finance Association.

If MENA represents Islamic finance’s past, the Asia-Pacific region—where the majority of the world’s more than 1 billion Muslims live—may represent its future.

Today, the Asian-Pacific region represents almost 25% of the global Islamic finance market. In Malaysia, sharia-compliant institutions account for close to one-quarter of the financial sector. Kuala Lumpur is one of the main drivers of the global sukuk market and weighs in on international compliance with the Islamic Financial Services Board, one of the world’s two major Islamic finance regulatory bodies.

Other mature Asian Islamic finance markets include Bangladesh, Brunei and Pakistan where sharia-compliant assets make up more than 15% of total bank assets.

Surprisingly, Islamic finance is still in its infancy in Indonesia even though its population is 90% Muslim. In 2023, sharia-compliant lenders accounted for only about 8% market share. In recent years, the authorities began to see the potential of Islamic finance and developed a roadmap to develop the sector with the help of Malaysian expertise that led to the consolidation of three entities to create of Bank Syariah, one of world’s ten biggest Islamic lenders. The country is also a pioneer for green Islamic bonds.

The nature of the African market—huge territories, little financial education, lack of regulatory frameworks—makes it challenging for Islamic banks to establish a presence in most Sub–Saharan countries. If sharia-complaint finance is to develop on the African continent, chances are will be led by banks from Egypt, Sudan and Morocco.

At this stage, Islamic finance in Africa tends to spread through private or sovereign bonds rather than brick-and-mortar banking. African governments see Islamic finance as a tool to raise development funds on international markets and diversify their pool of investors but so far, the results have been limited.

“We expect the top three sukuk issuers in Africa—South Africa, Egypt, and Nigeria—will continue to play a role in Islamic finance. Rated African sovereigns’ sukuk issuance amounts to almost $4.3 billion and has accounted for more than two-thirds of Africa’s total issuance of $6.6 billion since 2014” reports S&P in its 2024 assessment. However, “the complexities of sukuk and changes to sharia standards continue to intimidate African sovereign and slow adoption rates.”

In the aftermath of the 2008 crisis, Islamic finance appeared as a relatively safe alternative to the teetering Western banking system. Sukuks seemed like a good way to tap into new markets, Islamic funds represented opportunities to access large amounts of liquidity and Islamic banking was a way of monetizing local Muslim communities.

London positioned itself to become the hub for sharia-compliant finance in the Western world. Today, the UK boasts five licensed Islamic banks, over 20 conventional banks offering Islamic financial products.

Other European countries where Islamic finance made a remarkable start include:

France—which has the largest Muslim population in Europe—is also a promising market. Authorities (including France’s former minister of finance and IMF director Christine Lagarde) have pushed hard for the development of Islamic finance there, yet banks have largely failed to respond due to fears that being associated with Islam at a time when the country is targeted by terrorist attacks would damage their reputation. French investment banks however offer sharia-compliant products and services to cater to the needs of wealthy foreign clients. 

Russia has also started offering Islamic finance products through fintechs like Payzakat, or traditional banks. The idea is both to cater to its Muslim population and help its banks scale into MENA markets, like Sberbank the leading Russian lender who set up in Abu Dhabi in 2020.

Elsewhere in the world, some US banks have started offering sharia-compliant products but such offerings remain a very small niche. South America is the last continent where Islamic finance is taking root. Mexico is starting to think about it. In December 2017, Trustbank Amanah, the continent’s first Islamic bank, bank opened in Surinam.

Shortly after taking office on July 1, new President José Raúl Mulino confirmed one of his biggest campaign promises: the start of the 391-kilometer Panama-David rail project that will link the country’s disparate regions.

At an estimated cost of $5 billion, Mulino described the rail line as “the most important work of my government.” Construction is expected to take six years and generate 6,000 jobs.

An even pattern of development is much needed in the isthmian republic. Panama enjoyed double-digit growth from 2007-2011 from Canal expansion and other infrastructure projects. By 2013, GDP growth fell to 6.9%, once those projects ended. Corruption and governance failings were also a factor in this decline. Foreign direct investment (FDI) fell from $5.01 billion in 2017, to a nadir of $588.7 million in 2020, $3.7 billion less than 2019. This can be attributed mainly to the pandemic but poor governance played its part.

In May, Huawei selected Panama for its first Cybersecurity and Transparency Center. On the flip side, however, telecom operator Digicel announced in March that it was closing its Panama operations. The following month, Sinclair Oil closed its concession in Darién, which had been operating since 1923.

Given this mix of developments, voters are hoping that Mulino’s new administration will be a link to Panama’s recent “golden age” of economic growth, when FDI regularly reached $3.4 billion to $4.4 billion a year. In 2023, this had fallen to $2.2 billion and a KPMG report last year placed Panama as ninth most attractive for FDI in Latin America, below Argentina.

“We have to reverse that image that was damaged, but we will do it,” says Quevedo.

At a bilateral investment conference in Cairo on July 1, European Commission President Ursula von der Leyen announced that European companies were signing deals for more than $43 billion with Egyptian companies “ranging from hydrogen to water management, from construction to chemicals, from shipping to aviation and to automotive.” 

“Egypt really is enjoying a moment,” observes David Lubin, a senior research fellow at Chatham House in London and a seasoned global economic observer. That could well be an understatement.

Shortly before, GV Investments, Egypt’s sovereign investment fund, signed four agreements worth $40 billion with European developers to produce green ammonia, a renewable form of fertilizer that joins hydrogen extracted from water and nitrogen obtained from air. The deal potentially makes Egypt a big player in the renewable energy market.

Those announcements followed a partnership agreement that GV Investments signed in May with Chinese automobile manufacturer FAW to produce FAW’s low-cost electric sedan, the Bestune E05 model, locally for the Egyptian market. A month earlier, the EU announced that it would provide $1.1 billion in short-term financial aid to support the Egyptian economy, one leg of a $5.4 billion assistance package through 2027 that still needs to be approved by EU members. A month earlier, Egyptian President Abd el-Fattah el-Sisi’s government signed an expanded $8 billion loan deal with the International Monetary Fund.

And that followed close on the heels of the biggest deal of all: a $35 billion mega-investment by ADQ, Abu Dhabi’s sovereign wealth fund, to develop a stretch of Egypt’s Red Sea coast for tourism, real estate development, and other projects. Some of that commitment has already been fulfilled, Lubin notes, and is now bolstering the books of the Central Bank of Egypt and some of the Nile nation’s commercial banks.

ADQ’s investment represents a major vote of confidence in the el-Sisi government’s efforts to reform and open up Egypt’s creaky economy, and was likely a catalyst for the deals that followed, Lubin says. “Success builds on success,” he says, “and if Egypt can attract what amounts to just under 10% of its GDP from the United Arab Emirates, it minimizes the risk of a debt default, replenishes the central bank’s position, and gives confidence to other investors.”

What stands out about the July 1 deals, however, is the range of industries they represent.

Egypt has long been regarded as a narrow economy concentrated in just three sectors: energy, agriculture, and tourism. The Gulf and EU governments have plenty of reasons to want to help stabilize Egypt, with its 111 million people and strategic location with the war between Israel and Hamas flaring on one side and the Mediterranean, the pivot point of Europe’s migrant crisis, on the other. But what’s in it for European water management, automotive, and chemicals companies, among others?

“At the moment, these are just investment pledges,” notes Robert Mogielnicki, senior research scholar at the Arab Gulf States Institute in Washington, DC. “The proof will be which of these pledges materializes, and that depends on whether Egypt makes concrete progress on the economic front.”

That’s a tall order. Egypt shoulders a debt burden equal to more than 95% of its GDP, more than one in four Egyptians lives in poverty, and economic growth is stubbornly slow. But Lubin notes that Egypt, with its enormous market and strategic location, is a relatively inexpensive investment today compared to Europe.

“It helps that the Egyptian pound is exceptionally cheap,” he says. “Trade-weighted, it’s as cheap as it’s ever been.” That helps motivate foreign direct investors outside the three industries that traditionally have anchored the economy. The long-term assistance package from the EU, meanwhile, tells European companies that their governments are committed to making Egypt’s economic modernization a success, Mogielnicki notes.

Conditions for foreign investment could improve, too, if the government follows through on its commitments to the IMF. These have three pillars, Lubin says: switching to a flexible exchange rate and establishing a credible inflation target, tightening fiscal policy, and creating a level playing field, in part by reducing the army’s outsized presence in the economy. 

So, what could go wrong?

Given the magnitude of the EU companies’ pledges—and those from China and the UAE—they could meet with pushback from “entrenched domestic business interests” anxious not to be muscled out or reduced to accepting crumbs, Mogielnicki cautions. Those would include elements of the army, which is Sisi’s base of power.

A more immediate concern will be whether the government can fulfill its end of the IMF deal. The central bank has a long philosophical commitment to maintaining a stable currency, contrary to the IMF’s demand, Lubin points out. Setting and sticking to a credible inflation target will be difficult. And creating a more welcoming market environment for outsiders will be politically tricky if not impossible.

Time will tell which of the EU companies’ deals comes to fruition, and how they will affect Egypt’s economy and the people who make it up. Clearly, however, each element of the larger progress that is pulling together to modernize one of the world’s oldest societies—EU and IMF subsidies and loans, economic policy reform, and FDI—will have to work for all of them to succeed.

HSBC acted as custodian and agent-lender while QNB Financial Services (QNBFS) acted as the borrower. The QSE worked with Edaa, the licensed service provider under the Qatar Financial Market Authority that provides a range of essential services related to securities and financial instruments.

Hussein Fakhreddine, CEO at Qatari investment bank QInvest, said, “The transaction marks a milestone under the Financial Strategic Plan, which is part of the Qatar National Vision 2030, allowing more sophisticated investment strategies and unlocking a significant liquidity pool.”

QNBFS plans to offer this service to qualified investor clients that can benefit from new trading strategies on the QSE that were not possible before, according to Maha Al Sulaiti, Acting CEO at QNBFS. When demand for such transactions increase, it expects a commensurate growth in market volumes and liquidity.

QNBFS Chairman Adel Abdulaziz Khashabi said, “It’s important to note that SLB is one part of several key initiatives championed by the QSE to enhance the size and liquidity of Qatar’s equity market. Such initiatives include encouraging new listings via IPOs and direct listings, the most recent example being the successful listing of Techno Q on the Venture Market. We expect further IPOs and listings to stimulate demand and market activity. Going forward, introduction of a derivatives market should further stimulate market activity and bolster our appeal to institutional investors.”

QInvest is also looking to boost its activities and has aligned its investment banking advisory services consistent with Qatar’s 2030 vision for the financial sector. Fakhreddine said, “We are, and will continue to be, active in the securities market in the form of active mergers and acquisitions, as well as equity and debt capital market transactions.”

The Qatar Investment Authority has allocated QAR1 billion ($275 million) for a permanent market-making program at the QSE. Fakhreddine said, “This program aims to enhance market liquidity, improve price discovery, and diversify capital markets, thus attracting more foreign investments and boosting investor confidence.” The initiative is set to run for the next five years.

The development of SLB activities alongside other market initiatives will provide traders and investors with access to more sophisticated investment strategies, hedging mechanisms and securities financing. It is likely to attract new investors in the Qatari market and deepen the investment pool.

Each time, it has bounced back.

The latest such episode started in 2019 with the ongoing debt crisis, followed by a currency collapse and, in 2022, the fall of the scandal-ridden government of Rajapaksa. Since then, Rajapaksa’s successor, President Ranil Wickremesinghe has presided over yet another tentative economic recovery.

The government’s economic reform plans, including fiscal belt-tightening, foreign-debt restructuring and measures to attract foreign investment, received a vote of confidence in September 2022 when IMF staff and the Sri Lankan authorities reached a staff-level agreement to support Sri Lanka’s economic policies with a 48-month arrangement under an Extended Fund Facility of about $2.9 billion. By the third quarter of 2023, after six successive quarters of negative growth, the economy saw a positive turn. The country reported a current account surplus, disinflation, increased revenue and growing remittances from citizens working abroad.

For the better part of 30 years, Argentina has been making economic headlines for the wrong reasons. Its persistent and serious economic and social crisis led the country to default on its international sovereign debt in 2001, 2014 and, most recently, 2020.

The ongoing credit and currency crisis has left Argentina with the equivalent of only about 5% of GDP currently available in credit lines and mortgages; more functional economies tend to have the equivalent of at least 100% of GDP available.

Yet, opportunities within traditional sectors are opening up this year following a slew of initial shock-therapy measures implemented by the country’s controversial President, Javier Milei.

Even a minor improvement in economic conditions could generate a flurry of opportunity, says Matias Bellani, managing director in Argentina for global logistics and frieght company Craft.

“Argentina is an emerging market in the most hardcore sense,” he adds. “There are obvious risks associated with doing business. In the past years, we had to renegotiate payments and income with foreign partners since there was no certainty surrounding our ability to send and receive money.”

Yet, even in the most difficult years, Craft’s business importing and exporting commodities, chemicals and raw industrial materials for the automobile industry continued to function. “As foreign trade stabilizes, I can only see this growing at a very fast pace,” he says.

Fueled by booming oil production and rising export profitability, Guyana’s GDP grew an eye-popping 38% in 2023. This follows an even heftier 63% increase in 2022 as the Guyanese economy began to boost its profile on the world stage.

The 800,000-habitant nation’s lot began to change in 2015 when ExxonMobil announced the discovery of the Liza-1 well, a massive oil and gas field off Guyana’s Atlantic shore. Impressed by the reservoir’s potential, the Houston-based giant, in partnership with the local government and companies including Hess Guyana Exploration and CNOOC Petroleum Guyana, focused on exploring the larger region known as the Stabroek Block.

Drilling up to 18,000 feet below sea level, the consortium found several other massive oil and gas fields, vastly increasing the region’s projected output. “The Stabroek Block may be one of the most unprecedented exploration blocks of all time,” says Schreiner Parker, senior vice president and head of Latin America and the Caribbean at Rystad Energy, and energy research firm.

As oil prices jumped in the aftermath of the Covid-19 pandemic and the US and Europe sought alternatives to Middle Eastern and Venezuelan oil, Guyana’s economy took off due to the discovery of the Liza-1 oil well—growing an average of more than above 40% a year since 2020.

Looking ahead, global research firm BMI expects the combination of further oil discoveries, rising output and high geopolitical tensions to generate further GDP growth of 115% for Guyana by 2028, the fastest in the world. That poses the welcome challenge of transforming the nation’s newfound oil bonanza into sustained progress for its population. Getting there, however, will mean avoiding “Dutch disease”: the tendency of boom tied to a single commodity to stifle activity for the country’s other resources due to overall rising domestic prices.          

South Africa, with the continent’s most diverse and sophisticated economy, retains its attractiveness as a top destination for international investors who will be watching the country’s May 29 general elections with great interest.

However, prolonged and debilitating port and rail logistics deficiencies, erratic electricity supply, and poor governance are tarnishing some of its appeal.

Brad Maxwell, managing executive for investment banking at Nedbank CIB, tells Global Finance that international private equity and development finance investors have targeted South African sectors such as manufacturing, mining and agriculture. There has been a sharper focus on climate and infrastructure as strategic investors have recognized the value opportunities in South African companies.

This includes Luxembourg-based Ardagh Group’s $1 billion acquisition in 2022 of glass-packaging company Consol, Heineken’s purchase last year of brewing and beverage company Distell, and the latest moves by French entertainment group Canal+ to acquire pay-TV operator MultiChoice, currently owned by Johannesburg-listed multimedia company Naspers. Canal+ last year acquired 31.7% of MultiChoice.

“While South Africa has had limited GDP growth over the past few years, it remains the most industrialized economy on the African continent and still presents many opportunities for investors despite the economic challenges,” says Maxwell.

The logistics and infrastructure bottlenecks have resulted in some companies, such as Kumba Iron Ore, curtailing production. Steel company ArcelorMittal South Africa is considering shutting down some of its manufacturing operations.

Additional headwinds, such as suppressed platinum group metals prices, have forced Anglo American Platinum, Sibanye-Stillwater, and Impala Platinum to consider shuttering some mine shafts.

All this has negatively impacted South Africa’s productivity and, ultimately, its GDP performance. South Africa’s economy grew by 0.6% in 2023, according to recently lowered Treasury estimates, due to widespread power cuts, operational and maintenance failures in railways and at ports, and high living costs, said Finance Minister Enoch Godongwana in his February budget speech.

Against the backdrop of South African and emerging markets’ elevated inflation and of central banks raising interest rates in the past few years, predictions were that South Africa’s financial institutions would struggle with nonperforming loans.

FirstRand Bank, one of the largest commercial banks in South Africa, reported that bad loans had crept up, with the credit loss ratio for the half-year period to the end of December 2023 increasing to 83 basis points (bps) against 74 bps a year earlier.

South Africa’s financial services sector primarily comprises banks that are expanding their exposure in numerous sub-Saharan African countries as conditions back home stagnate.

Samira Mensah, director of financial institutions ratings at S&P Global Ratings, tells Global Finance that South African banks are currently “very profitable despite the tough macroeconomic conditions.”

Mensah notes that South African finance institutions are poised to maintain strong risk-adjusted returns of 15%-16% on average in 2024, supported by net interest margins and transactional revenue.

“The latter supports revenue and earnings resilience in an economic downturn. This, in turn, will support banks’ internal capital generation. Lastly, the finalization of banks’ plans to build up additional loss-absorbing capital will contribute to their balance-sheet strength,” she adds.

For FirstRand’s FNB retail banking outlet, which in February reported interim earnings for the half-year period to the end of December, there has been robust growth from digital channels that the report says “continued to deliver solid volume growth.” This aligned with the bank’s “strategy to drive customer takeup of digital interfaces and migration to the FNB app,” the volume of which was up 14%.

“Increased card activity also resulted in good growth in transactional volumes,” according to the South African retail bank.

South African banks’ projected resilience and profitability mainly result from these finance institutions still having solid enough buffers to absorb additional asset-quality risks, given their robust pre-impairment profitability and stable solvency metrics, ratings agency Fitch adds.

“Lending growth, which decelerated in 2023, will remain muted in 2024, in mid-single digits. This is due to the slow improvement in domestic demand and private consumption amid the still-unreliable electricity supply, weak disposable income growth, and still-high market rates, constraining loan affordability for households,” said Fitch in a recent note on the South African banking sector.

Fitch adds that the corporate banking segment is set to drive lending expansion. The agency also details that South African banks have a high propensity to support their major sub-Saharan African subsidiaries.

Regional operations are necessary for the South African banks’ Pan-African strategies and to manage high reputational risks in case of a subsidiary default. In the case of Standard Bank, operations outside of South Africa have “continued to perform very well and delivered strong earnings growth period-on-period in both reported and constant” currency, according to the bank.

Standard Bank’s African regional subsidiaries’ contribution to group headline earnings has now climbed up to 44%, according to the bank.

“We believe support will likely be manageable for the South African banks, given their sufficient capital buffers and relatively small regional operations, which are well-diversified by country,” write the authors of Fitch’s note.

Moody’s reckons that the South African banks’ robust capital generation will allow the banks’ Common Equity Tier 1 capital ratio to remain above 13%. At the same time, existing liquidity buffers and historically stable funding will continue to support financial stability.

The agency has assigned a “stable outlook for the South African banking sector,” balancing high macroeconomic and asset risk against the banks’ sound financial metrics and prudent risk management.

But for Brad Maxwell, managing executive for investment banking at Nedbank CIB, South African banks have become more relevant in Africa, having grown their lending businesses in primary sectors such as mining, energy, infrastructure, property finance, agriculture, and sovereign lending.

“Furthermore, clients banking with Southern African banks enjoy the convenience of moving funds across countries in Africa using a single electronic banking platform,” says Maxwell.

Nedbank has been going all out in building relationships with equity providers based in the rest of the world who generally invest in higher-risk sectors in Africa. This has helped the South African lender to act as an investment capital conduit into the rest of the continent.

With almost all other African economies growing at substantially higher rates than the South African economy, thus presenting desirable investment opportunities, South African banks are spreading their risks equally across sub-Saharan Africa, which has a population of some 1.5 billion people, including a young, largely educated, and urbanizing workforce with an entrepreneurial culture.

“While higher US dollar interest rates have increased the cost of capital, international investors from the Middle East, Europe, America, Australia and Asia are key sources of funding for the continent, and South African banks have been important conduits to tap international markets,” Maxwell explains.

Moody’s analysts expect the banks to record “stable profitability,” with a return on assets of around 1.1% owing to improved digitalization and high net interest margins, which are expected to “compensate for higher loan-loss provisioning needs” and the resultant subdued credit growth.

However, energy and logistic constraints hammering South Africa, restrictive monetary policies and high government debt are significant limits to South Africa’s growth potential, even for the banking sector—although higher average interest rates supported net interest margins for banks such as Standard Bank.

Nonetheless, the bank’s net interest margin expansion slowed down in recent months, given that interest rate increases have bottomed out.

“Lower demand reduced affordability, and competitive pricing pressure (particularly in mortgages in South Africa) resulted in lower disbursements to retail and business clients and a slowdown in growth in the related loan portfolios,” Standard Bank said in a trading update for 2023 year-to-date as of October 31. “Corporate origination remained strong, driven by energy-related opportunities.”

South African banks are nonetheless hedged against risks related to rising and falling interest rates as margins expand in a high-rate environment, cushioning against the impact of rising credit losses emanating from bad debts, Standard Bank tells Global Finance.

“In a rising interest rate environment, [South African] banks may see higher revenue growth through positive endowment. However, the cost of risk increases, and they may face higher credit impairments as clients have higher interest charges to pay.”

For its part, Standard Bank has benefited strongly from margin expansion while managing credit losses, although it describes the South African investment banking sector as “fiercely competitive: with well-established and sophisticated domestic, as well as some large international, banks.”

Estonia, for decades the most economically dynamic of the three former Soviet Baltic republics, is rapidly evolving into one of the strongest digital and innovative minnow economies within the EU. Estonia has, since its independence from the Soviet Union in August 1991, replaced a creaking agricultural economy with a vibrant next-generation infrastructure powered by flat-tax policies to attract foreign investment and grow indigenous wealth.

Against the backdrop of its ever-digitalizing economy and of regional investment funds accessible due to its EU membership, Estonia continues to strengthen its reputation as a hotbed for innovation in emerging industrial and financial technologies such as cybersecurity, 6G telecommunications, artificial intelligence (AI), blockchain and cryptocurrencies.

Prime Minister Kaja Kallas’ liberal-center coalition government, which took office in April 2023, has started reforming fiscal policies to bolster Estonia’s image as a modern, open, cost-efficient, and tax-friendly European economy that offers talented technologists across the spectrum.

The Kallas administration’s plans to reform taxes and incentives to develop Estonia’s long-term potential as a leading hub for next-generation technologies and innovation have been complicated by Russia’s invasion of Ukraine in February 2022.

The government issued €1 billion worth of 10-year bonds in January 2024, a large part of which will be used to cover this year’s budget deficit.

“We expect the national budget will carry a deficit in 2024. Proceeds from the bond will cover around half of our borrowing needs this year. It is satisfying that there is strong international interest in the issue,” says Sven Kirsipuu, the Ministry of Finance’s deputy secretary general.

Estonia had previously issued €3 billion in long-term bonds between 2020 and 2023. The last issue was in June 2023, carrying an interest rate of 3.62%.

The Estonian bond issue program enables the government to free up funds to finance important tax reform, infrastructure, AI and digitalization, and market-efficiency programs. Pivotal projects requiring large-scale funding include the Rail Baltica and Nordic-Baltic Hydrogen Corridor.