Fitch Ratings has affirmed Abu Dhabi’s Long-term foreign and local currency Issuer Default Ratings (IDR) at AA. The issue ratings on Abu Dhabi’s senior unsecured foreign and local currency bonds have also been affirmed at AA. The Outlooks on the Long-term IDRs are stable. The short-term foreign currency IDR has been affirmed at F1+. The UAE’s Country Ceiling has been affirmed at AA+; this ceiling applies to Abu Dhabi and Ras al-Khaimah.
The AA rating reflects the following factors:
Abu Dhabi’s financial buffers provide resilience to lower oil prices. The external sovereign balance sheet is the second-strongest of all countries rated by Fitch, behind Kuwait. Fitch estimates that sovereign foreign assets rose to 181 per cent of GDP at end-2014 compared with direct sovereign external debt of just 0.6 per cent of GDP. Sovereign net foreign assets are forecast at 178 per cent of GDP at end-2016 based on conservative assumptions for investment performance.
A small budget deficit (including estimated investment income and dividends from state oil company ADNOC) is forecast in 2015 as lower oil revenues outweigh a likely significant reduction in spending. Budgeted spending was cut by one-third and data for the first four months show that on a pro-rata basis spending was only 3.7 per cent above budget. The fiscal position is forecast to return to surplus in 2016, based on Fitch’s assumption of higher oil prices. The current account surplus is estimated to have exceeded 20 per cent of GDP in nine of the past 10 years and should remain around double digit levels in 2015 and 2016.
Real GDP growth tends to exceed peers and is estimated at 5.3 per cent in 2014, with non-oil growth over 7 per cent. Non-oil growth has averaged 7.3 per cent over the past decade, faster than growth in the oil sector for the bulk of this period. Lower government spending and a slowdown in neighbouring Dubai are expected to slow non-oil growth to around 4.5 per cent to 2016.
Inflation is greater than and more volatile than peers. This largely reflects the influence of real estate cycles, with rents pushing headline inflation to around a six-year high of 5.3 per cent in May. Adjustments to administered prices at the start of 2015 have also pushed up inflation. A stabilisation of house prices should allow inflation to moderate gradually, in addition to easing risks to banks. Bank performance is improving in line with the strengthening of the economy and NPLs continue to trend downwards.
Debt of government-related enterprises (GREs) and state-owned enterprises (SOEs) fell to an estimated 34 per cent of GDP at end-2014, reflecting the authorities commitment to containing indebtedness. Further deleveraging is expected throughout the forecast period. Explicit contingent liabilities are clearly delineated and GREs and SOEs borrowing plans are scrutinised by the authorities. Abu Dhabis ability to support its GREs and SOEs is not in question. Potential contingent liabilities are unlikely to be material compared with Abu Dhabis assets.
The economy is heavily dependent on oil, which accounts for around 50 per cent of GDP and around 85 per cent of fiscal and external revenues. However, oil production per capita is one of the highest in the world and supports high GDP per capita. Proven oil reserves are large, production costs are low and production capacity and downstream facilities are being expanded.
Structural indicators are mixed relative to peers. GDP per capita is the second highest of all Fitch-rated sovereigns, but human development indicators are below the median. The Doing Business score and most World Bank governance indicators have improved in recent years and are in line with the peer median, although voice and accountability is weak. The World Bank ranks political stability above the peer median and the political scene is stable. Fitch considers geopolitical risks to be elevated compared with some peers.
Economy policymaking tools, primarily at the federal level, are weak, although steps to develop the policy framework continue. A macro-fiscal unit has been established at the Department of Finance and use of macro-prudential tools has increased. Nonetheless, Abu Dhabi is primarily dependent on its fiscal and external buffers to absorb shocks.
Major gaps in the transparency and availability of data remain despite improvements and few high frequency indicators are disseminated. In particular, a comprehensive external balance sheet is not published and there is less information on the sovereign balance sheet than peers.
RATING SENSITIVITIES
The main factors that, individually or collectively, could lead to positive rating action are:
- Addressing deficiencies in structural indicators and strengthening policymaking institutions, relative to peers, which would ultimately be conducive to reducing the economys dependence on oil.
- An improvement in the transparency and availability of key data.
- The main factors that, individually or collectively, could lead to a negative rating action are:
- A sustained period of oil prices sharply lower than Fitchs forecasts that erode fiscal and external buffers, coupled with the crystallisation of contingent liabilities.
- Spill over from a regional geopolitical shock that impacts economic, social or political stability