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Abu Dhabi - Stable outlook balances the strong financial position

Global Arab Network - - George Haddad

Wednesday, 25 November 2009 13:52

Standard & Poor's Ratings Services today said it had affirmed its 'AA' long-term and 'A-1+' short-term sovereign credit ratings on the Emirate of Abu Dhabi, a member of the United Arab Emirates (UAE). The outlook is stable. The 'AA+' Transfer & Convertibility assessment is unchanged.

"The ratings on the Emirate of Abu Dhabi are supported by the government's very strong asset position, which provides significant financial flexibility, and which has allowed Abu Dhabi to face the global economic downturn with a high degree of resilience," Standard & Poor's credit analyst Farouk Soussa said.

The ratings are also supported by the country's high level of political stability and wealth, underpinned by its rich resource endowment, and by policies that reinforce Abu Dhabi's integration with the global economy. The ratings are constrained by the geopolitical risks that face all sovereigns in the region, the limited disclosure on the government's assets, and the contingent liabilities arising from the banking system and the public sector of the UAE as a whole.

The government of Abu Dhabi has accumulated substantial foreign and domestic assets, which are the product of a high resource endowment and prudent fiscal policies over past decades. We estimate the government's net asset position to be more than 300% of GDP in 2009 and 320% in 2010--one of the highest among rated sovereigns. While volatility in global oil prices reduces the predictability of government revenues, we expect that the Emirate's budget will continue to show substantial surpluses of around 15% of GDP in the medium term. We anticipate that these surpluses will be used largely for further asset accumulation, with financing for the government's proactive diversification policies being partially sourced in international capital markets. In 2009, the government and its affiliated companies have issued around $7 billion, or around 10% of GDP, for this purpose.

Per capita GDP, which we expect will average around $75,000 over the next three years, is higher than that of most 'AA' rated peers. Growth is supported by a track record of prudent macroeconomic policies, careful management of oil and gas resources, and proactive diversification policies.

Structural weaknesses and challenges remain, however. First, the independent institutions, accountability, and transparency needed for the functioning of an efficient market economy are, by and large, still in the early stages of development. Second, high levels of debt in the public sector in the UAE as a whole, along with its complicated and close linkages with the private sector, create a dependence that suggests a contingent liability for Abu Dhabi, as the wealthiest Emirate in the UAE. Third, like other sovereigns in the region, Abu Dhabi is exposed to event risks such as a sharp escalation in hostilities between Iran and the West, or terrorist attacks. Such developments might raise risks in the UAE's banking and property sectors. Event risk and contingent liabilities are not expected to threaten political or social stability, and Abu Dhabi is capable of absorbing potential costs through existing government assets.

The stable outlook on Abu Dhabi balances the Emirate's strong financial position and prudent policies against geopolitical risks, rising contingent liabilities, and potential impediments to growth stemming from undeveloped institutions. Significantly reduced geopolitical risk would be important in raising the rating in the future. Conversely, a sustained worsening of political and event risks, or a significant and sustained erosion of the government's asset position, would put the government's creditworthiness under pressure.

Global Arab Network

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