Global Arab Network | UAE: Stable outlook rating reflects strength of Abu Dhabi's sovereign fund

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UAE: Stable outlook rating reflects strength of Abu Dhabi's sovereign fund

Global Arab Network - - Rabih Serrai

Friday, 23 September 2011 14:41

http://www.english.globalarabnetwork.com/images/stories/2009/Sep/uae_flg_dubai_abu_dhabi-.jpg

Global Arab Network - Fitch Ratings has affirmed Abu Dhabi's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with a Stable Outlook. Fitch has also affirmed Abu Dhabi's Short-term foreign currency IDR at 'F1+'. The UAE Country Ceiling is affirmed at 'AA+', Global Arab Network reports according to a press statement.

"The affirmation and Stable Outlook reflect the continuing strength of Abu Dhabi's sovereign balance sheet, which conveys exceptional fiscal flexibility," says Richard Fox, Head of Middle East and Africa Sovereigns at Fitch. "The 2008-2009 global financial crisis was a severe stress test for Abu Dhabi, but one which left its balance sheet largely undented. Any future stress would have to have harsher consequences than this to trigger negative rating action," Fox added.

Abu Dhabi's rating is anchored by one of the strongest balance sheets of any rated country. Foreign assets, including equity investments, are estimated by Fitch at approaching USD300bn, with just USD4bn of direct sovereign external debt. Sovereign net foreign assets of an estimated 167% of GDP are therefore second only to Kuwait. Fitch estimates gross sovereign financial assets by the end of 2011 will be 16% higher than their end-2007 level, having dipped only slightly in 2008. At current oil prices, they are forecast to rise steadily, propelled by investment returns and overall fiscal surpluses.

The agency estimates the overall fiscal balance, including ADNOC dividends and ADIA investment income, was close to balance last year, and forecasts a double digit percentage of GDP surplus this year, based on higher oil prices and production and contained spending. This comes after a heavy deficit in 2009 when fiscal policy was determinedly countercyclical and exceptional assistance was provided to Dubai and to Abu Dhabi banks and state-owned and government related enterprises (SOE/GREs).

The budget strategy remains firmly focussed on fiscal consolidation. Overall spending was essentially unchanged last year and is budgeted to fall this year, although this may prove ambitious. Some investment projects have been scaled back and others are under review. The objective of diversifying the economy remains, but will likely take place at a more measured pace from now on. Non-oil real GDP growth will therefore likely slow from the 5% pace estimated for 2009-2010.

SOE/GREs, banks and other emirates remain potential contingent liabilities. Support of around 10% of GDP was provided to Abu Dhabi banks and Dubai in 2009 and total budget support for SOE/GREs exceeded 8% of GDP last year. While this demonstrates the potential cost of contingent liabilities, Abu Dhabi's ability to provide such support without seriously denting its balance sheet also emphasises its considerable fiscal flexibility. There is a risk that Abu Dhabi will have to dedicate more resources to meeting contingent liabilities, but Fitch considers potential liabilities are still small compared with sovereign assets.

Abu Dhabi's overall balance sheet, taking into account all of its entities' external debt, remains stronger than 'AA'/'AAA' medians but is weaker than some 'AA' peer countries. However, SOE/GREs also have external assets which Fitch's analysis cannot take into account in the absence of a comprehensive balance sheet for "Abu Dhabi Inc."

Abu Dhabi has the third-highest per capita income of any rated sovereign, founded on a high per capita hydrocarbons endowment. However, human development and business environment indicators (albeit for UAE as a whole) are generally weaker than 'AA' medians. Political stability is high, and UAE has been spared the protests seen elsewhere in the region this year. However, checks and balances on executive power and governance are weak for a typical 'AA' sovereign.

Financial and oil wealth helps offset weaknesses such as high economic and fiscal dependence on oil and limited transparency compared with most other 'AA'-rated sovereigns. Although transparency on Abu Dhabi's external debt and the quality of economic statistics is improving, improved transparency on the level of foreign assets would be a necessary condition for any positive rating action. However, barring a severe and prolonged slump in oil prices and/or a sustained major fall in sovereign assets, the biggest downside risk to the rating is posed by a major geopolitical event.

Global Arab Network

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