Fitch Ratings has today assigned Abu Dhabi's new GMTN programme a 'AA' rating. The rating will apply to an upcoming inaugural bond issue under the programme. The rating is in line with Abu Dhabi's Long-term foreign currency Issuer Default Rating (IDR) of 'AA' which has a Stable Outlook.has registered a GMTN programme envisaging issuance of up to USD10bn in global sovereign bonds, designed to tap the market at benchmark sizes and at medium-term maturities. The government previously issued a debut USD1bn, five-year sovereign eurobond in July 2007. The latest issuance will consolidate Abu Dhabi's presence in the market, establish a yield curve and enhance already considerable financing flexibility.

"Although well-placed to weather shocks, Abu Dhabi has been hit by the steep fall in the oil price and falling investment returns," says Charles Seville, Associate Director in the Sovereign group at Fitch. Government revenues, dominated by oil export earnings, will shrink to less than half of 2008 levels and Fitch forecasts a fiscal deficit of 10% of GDP in 2009.

Government policy is to press ahead with Abu Dhabi's development and diversification programme and thereby keep the economy growing. In recognition of the weaker global growth outlook, however, the government will postpone or re-phase some projects according to market conditions.

As in previous episodes of falling oil prices, the Abu Dhabi government will draw significantly on the dividend from the national oil company, ADNOC, and income earned by its main sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), to fund the budget. After a rise of 54% in spending in 2008, the government is budgeting a fall in spending of 13% in 2009, despite higher capital spending. But even if world oil prices average just USD40 per barrel in 2009, the general government, which includes income received by ADIA, and the ADNOC dividend, will continue to record a surplus.

Abu Dhabi's external assets, mainly held at ADIA, are understood by Fitch to be equivalent to at least 200% of GDP. Like most other investors around the world, ADIA suffered capital losses on its investments in 2008, but it also received major inflows as high oil prices boosted government revenues and national oil company profits. Its net external creditor position is stronger than that of Saudi Arabia ('AA-' (AA minus)/Outlook Stable) and comparable to Kuwait ('AA'/Outlook Stable) and has been resilient to the oil price and financial market shocks seen over the past year.

Abu Dhabi's existing USD1bn sovereign bond is the only direct government debt, equivalent to less than 1% of GDP. Maximum issuance under this new programme would amount to the equivalent of around 10% of forecast 2009 GDP, leaving maximum total debt well below the 'AA' median of 21% of GDP forecast for 2009. Abu Dhabi would remain one of the strongest net external creditors rated by Fitch.

Notwithstanding its low direct debt, Fitch has previously stressed the existence of contingent liabilities in the wider public sector. Total external debt of the public and private sectors is estimated by Fitch at up to USD50bn (36% of 2008 GDP) at end-2008, around half of it owed by wholly or majority state-owned enterprises.

Abu Dhabi also pledged in February to inject USD4.3bn in capital into the five principal banks based in the emirate. The measure was designed to give banks sufficient resources to absorb future losses and continue to lend. This is in addition to federal government support. Two of the largest banks in the UAE recently announced that they were converting federal government deposits into regulatory capital.

Abu Dhabi is also the main contributor to the UAE Federal government budget. The Abu Dhabi government stands ready to support other emirates if it deems this desirable, although there is no formal legal responsibility for it to do so and any request from another emirate would be treated on a case-by-case basis. Fitch does not treat Dubai entities as a formal contingent liability on Abu Dhabi.