Ras al-Khaimah affirmed at A

Fitch Ratings has affirmed Ras al-Khaimah’s long-term foreign and local currency issuer default ratings (IDRs) at A with a stable outlook. The issue ratings on RAK Capital’s senior unsecured foreign- currency bonds are also affirmed at A.

The UAE country Ceiling has been affirmed at AA+.

This Ceiling applies to Ras al Khaimah and Abu Dhabi. Ras Al Khaimah’s short-term foreign- and local-currency IDRs are affirmed at F1.

“The ratings balance the benefits of Ras al Khaimah’s membership of the UAE, low debt metrics, strong growth and solid fiscal performance against persistent weaknesses in data quality and in the macro policy framework, as measured against A category peers,” Fitch said in a statement.

The emirate derives substantial support from its membership of the UAE federation. It shares the UAE monetary and exchange rate system of a credible US dollar peg and absence of exchange controls. The emirate does not need its own foreign exchange reserves, and UAE support compensates for the lack of external sector data. Most public services and infrastructure are provided directly by the federal government, making the emirate’s spending more flexible than peers’ and relieving it of the obligations of a typical sovereign.

“The authorities are continuing to improve financial planning, budgeting and data collection, but this is a difficult task subject to delays and risks,” Fitch said. “Dedicated institutional statistics capacity is being added, but the new statistics and studies centre will have to undertake extensive foundation work before it can substantially expand the set of information provided on economic developments. Regular reporting of quarterly GDP has proved to be elusive since 2012, held back most recently by the late introduction of the Federal Competitiveness and Statistics Authority.”

The government’s Financial Planning & Analysis Division has introduced quarterly budgeting and performance evaluation, introduced a three-year budgeting cycle, and has strengthened oversight and engagement with state-owned enterprises (SOEs), particularly relating to capital spending.

The Treasury expects to introduce dividend, loan, and guarantee policies in 2016-17. Although new and untested as of yet, these policies should help the emirate’s leadership identify, anticipate, and respond to fiscal risks in a timely manner, Fitch said.

Real GDP growth has been revised down to 3.3 per cent for 2014 and 1.3 per cent in 2015 from 7.4 per cent and 3 per cent, respectively.

“The reasons for the revision are unclear but it may be related to weak re-export activity,” Fitch said. “We maintain our 2016-2018 GDP growth forecast at 4 per cent (well above the A median forecast of around 3 per cent), given the methodological imperfections of the GDP series and the significantly more expansionary dynamics suggested by high-frequency indicators.“

The headline government debt ratio will fall to 17 per cent of GDP in 2016 from 21.8 per cent in 2015, well below the ‘A’ median of 52 per cent. Longer-term debt dynamics are favourable, and the government intends to finance spending and debt repayments with internal resources in 2016-17, pending more clarity on developmental priorities in the new National Vision.

Debt numbers do not include debt of unlisted SOEs (7 per cent of GDP, mostly guaranteed), but even including those liabilities general government debt would be well below the category median.

“We expect the government budget to post a surplus of 1.1 per cent of GDP in 2016, after a balanced budget in 2015; the budget consolidates revenue and expenditure of SOEs (with the exception of RAK Bank), and we include net equity investments by SOEs in total expenditure,” Fitch said. “Revenue is growing strongly in most categories, particularly real estate and healthcare where our forecast was previously more conservative.”

Fitch said it is not yet clear how the introduction of value added tax at the UAE level in 2018 could affect the emirate’s budget.