Fitch Ratings has affirmed Ras Al Khaimah’s (RAK) Long-term foreign and local currency Issuer Default Rating (IDRs) at ‘A’ with Stable Outlooks. The Short-term foreign currency IDR has also been affirmed at ‘F1′. The Country Ceiling has been affirmed at ‘AA+’, the same level as that of the United Arab Emirates (UAE), of which RAK is a member.
KEY RATING DRIVERS
The ratings balance the benefits of RAK’s membership of the UAE, its low debt and strong fiscal current surplus against weaknesses in data quality and the macro policy environment.
RAK is the fourth-largest emirate in the UAE and its rating derives substantial support from this membership. RAK benefits from the UAE’s strong fiscal and external sector positions, supported by Abu Dhabi’s (AA/Stable) oil income and wealth. External finances do not currently constrain RAK’s ratings.
RAK’s public finances also benefit substantially from federal government (FG) support. Most basic public services and infrastructure are provided directly by the FG, relieving RAK of many of the obligations of a normal sovereign. We do not factor potential exceptional support from the FG into the ratings.
RAK has broadly achieved a budget surplus since 2009, and public debt stands at around half the peer median. Fiscal outturns in 2013 outperformed Fitch’s forecasts, with a budget surplus of 2.8% of GDP achieved mainly through a drop in capital and investment spending, whereas current spending rose by 26%. Revenues increased across the board in line with a robust economic performance. Debt-to-GDP is projected by Fitch to decline to around 20% in the medium term from 26.2% as of end-2013.
Indicators of robust economic performance in 2013 and in 1Q14, along with a statistical adjustment to account for cyclical fluctuations, have led the authorities to upgrade their growth forecast for 2014. The main drivers of growth are expected to stem from government-led construction activity and an expansion of the tourism sector. Free zones such as the industrial production zone will continue to support growth in RAK’s manufacturing sector. Dubai’s successful bid at hosting the Expo 2020 event is also likely to provide an added boost to RAK’s GDP in the run up to the event.
Institutional weaknesses continue to constrain the rating. The availability of data in the UAE is weaker than most Fitch-rated sovereigns. RAK’s data quality is partly constrained by inadequacies at the FG level. National accounts are particularly weak, with no real GDP data. Balance of payments and monetary data are only compiled for the UAE in aggregate. Fiscal data provision in RAK is adequate and public-sector wide, with strong central control.
Like other sovereigns in the region, voice and accountability and institutional checks on the executive are also weak compared with peers.
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently well balanced. The main factors that, individually or collectively, could lead to a positive rating action are:
- Strengthened structural fundamentals, including improved institutional framework and data transparency and quality to better track the economy and the development programme.
- Lower debt and strengthened fiscal buffers would be beneficial, given past volatility of revenue streams.
The main factors that, individually or collectively, could lead to a negative rating action are:
- A weakening in public finances prompted by further large increases in current spending, if sustained for a prolonged period would bring downward rating pressure.
- A materialisation of potential contingent liabilities resulting in a marked increase in the net debt position.
- An outbreak of hostilities in the region, particularly affecting the nearby Straits of Hormuz, would bring negative rating pressure.
The ratings and Outlooks are sensitive to a number of assumptions:
- The current political and financial relationships linking individual emirates within the UAE federal system are assumed to be maintained. In particular, no weakening of support from the FG and Abu Dhabi for the smaller emirates is envisaged
- No challenge to the rule of the royal family or the current succession
- RAK is in a volatile region and its rating factors in existing tensions and conflicts which are assumed to continue but not materially worsen. Fitch assumes that regional geopolitical conflicts will not impact directly on RAK or on its ability to trade.
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