Fitch Ratings has affirmed Abu Dhabi’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AA’. The Outlooks are Stable. The issue ratings on Abu Dhabi’s senior unsecured foreign and local currency bonds have also been affirmed at ‘AA’. The Short-term foreign currency IDR has been affirmed at ‘F1+’. The UAE Country Ceiling has been affirmed at ‘AA+’; this Ceiling also applies to Ras al-Khaimah.
KEY RATING DRIVERS
The affirmation reflects the following factors:
Abu Dhabi’s external sovereign balance sheet is estimated to be the second-strongest of all countries rated by Fitch, behind Kuwait (AA/Stable). Sovereign net foreign assets are estimated to have increased to 178% of GDP at-end 2013, from 151% of GDP one year earlier, sufficient to cover five years of government spending. The repayment of a Eurobond in early 2014 has cut central government external debt to 0.6% of GDP. Sovereign net foreign assets are conservatively forecast to remain around 170% of GDP by end-2016.
Major gaps in the transparency and availability of data remain, despite recent improvements. In particular, a comprehensive external balance sheet is not available and there is less information on the sovereign balance sheet than peers. Few high frequency indicators are disseminated.
Abu Dhabi tends to record large fiscal and current account surpluses. Although fiscal spending rose by around 3% of GDP and revenue fell slightly in 2013, a near-double digit fiscal surplus was recorded once Abu Dhabi National Oil Company dividends and Abu Dhabi Investment Authority (ADIA) investment income are included. Falling oil revenues, in line with Fitch’s price forecasts (see Key Assumptions below), will narrow the surplus each year to 2016. The current account surplus is estimated by Fitch to fall to 7.6% of GDP in 2016 from 16.6% of GDP in 2013.
Real GDP growth is well in excess of peers, at 5.2% in 2013. Non-oil growth was 7.4%, the fastest in seven years, and has averaged 7.9% over the past decade. Non-oil growth should remain buoyant over the forecast period, supported by project spending, a benign external environment and positive domestic sentiment.
Debt of government-related enterprises (GREs) and state-owned enterprises (SOEs) fell to 35.4% of GDP in 2013 (around one-quarter of this is non-recourse), reflecting the authorities’ commitment to containing indebtedness. Explicit contingent liabilities are clearly delineated and GREs and SOEs borrowing plans are controlled by the authorities. Fitch believes Abu Dhabi’s ability to support its GREs and SOEs is not in question. Potential contingent liabilities are unlikely to be material compared with Abu Dhabi’s assets.
Bank performance has improved in line with the strengthening of the local and Dubai economies. NPLs of Abu Dhabi banks have declined to a five-year low and provisioning is at a six-year high, although asset quality issues remain. Capital adequacy is high, at 17.8% at end-March 2014. Fitch does not consider that surging residential real estate prices pose a serious risk to banks. Unlike the 2008 boom, the current run-up in prices is not reliant on leverage and is backed by stronger fundamentals. The authorities are also more attuned to the risks from rising house prices. Rising rents and a buoyant economy are pushing up inflation, which is forecast to average 5% in 2016.
The economy is heavily dependent on oil, which accounts for around 50% of GDP and the bulk of fiscal and external revenues. Spending of oil revenues is a key driver of the non-oil economy. However, oil production per capita is one of the highest in the world and supports high GDP per capita. Proven oil reserves are large, production costs are low and production capacity and downstream facilities are being expanded.
Structural indicators are mixed relative to peers. GDP per capita is the second-highest of all Fitch-rated sovereigns, but human development indicators are below the median. The World Bank Doing Business score and most World Bank governance indicators (last updated with 2012 data in September 2013) have improved in recent years and are in line with the peer median, although voice and accountability is weak. The World Bank ranks political stability above the peer median and the political scene is stable. Fitch considers geopolitical risks to be elevated compared with some ‘AA’ rated peers.
Economy policymaking tools, primarily at the federal level, are weak compared with peers, although steps to develop the policy framework continue. A macro-fiscal unit has been established at the Department of Finance and use of macro-prudential tools has increased. Nonetheless, Abu Dhabi is primarily dependent on its fiscal and external buffers to absorb shocks. The US dollar peg constrains interest rates at or near US levels, which are increasingly negative in real terms.
The Outlook is Stable. Consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. The main factors that, individually or collectively, could lead to positive rating action are:
- An improvement in the transparency and availability of key data, including the sovereign balance sheet.
- Addressing deficiencies in structural indicators and strengthening policymaking institutions, relative to peers.
The main factors that, individually or collectively, could lead to negative rating action are:
- A sustained period of sharply lower oil prices that materially erodes fiscal and external buffers, coupled with the crystallisation of significant contingent liabilities.
- Spill over from a regional geopolitical shock that impacts economic, social or political stability.
Fitch forecasts Brent crude to average USD108/b in 2014, USD100/b in 2015 and USD95/b in 2016. Abu Dhabi could likely tolerate much lower prices over the forecast period without facing undue pressure on its rating.
No major change is expected in ADIA’s relationship with and use by the Emirate of Abu Dhabi or in its investment guidelines.
Fitch assumes that regional geopolitical conflicts continue, but will not have a direct material negative impact on Abu Dhabi or its ability to trade.
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