Dubai: The drop in oil prices will likely slow Abu Dhabi’s economic growth in 2015 but the emirate’s sizeable stock of foreign assets and prudent spending will help cushion the impact of lower oil revenues in the coming years, according to Moody’s Investors Service.
“We expect that resources accumulated during years of high oil prices, and a prudent budgeting of oil proceeds, will mitigate the negative consequences of oil price volatility on Abu Dhabi’s fiscal and external accounts,” said Steven Hess, a New York-based analyst at Moody’s.
Analysts say a prolonged period of low oil prices would see Abu Dhabi’s fiscal buffer gradually weaken, unless the government limits spending increases and continues to manage effectively contingent liabilities residing in Abu Dhabi’s and other emirates’ public sector corporations.
Moody’s scores Abu Dhabi’s economic strength at very high (+), similar to Norway Qatar, and Kuwait. This assessment reflects Abu Dhabi’s considerable hydrocarbon wealth and strong diversification efforts under way. Additionally, income from Abu Dhabi’s evidently sizeable stock of foreign assets will help cushion the impact of declining oil prices on the UAE economy.
Abu Dhabi’s nominal GDP is estimated $262 billion (Dh962 billion); it makes up about 63 per cent of the UAE’s economy, compared to 28 per cent of the UAE’s population. With a relatively small population of 2.4 million, Abu Dhabi’s economy is similar in size to Finland and Chile, both of which have considerably larger populations.
The emirate has a sizeable stock of offshore assets in its off-budget investment vehicles, including in the Abu Dhabi Investment Authority, Abu Dhabi Investment Council, International Petroleum Investment Company (IPIC) and Mubadala. These exceed the total liabilities of Abu Dhabi government-related institutions and other emirate governments, according to Moody’s.
“Growth in Abu Dhabi’s economy, which remains largely dominated by the hydrocarbon sector, will remain volatile. We estimate that real GDP will slow to below 3 per cent from an estimated 4.1 per cent in 2014, while the government will likely incur a fiscal deficit estimated at 1.1 per cent of GDP for 2015 after years of registering large surpluses,” said Hess.
Fiscal deficits
Moody’s said if the period of low oil prices is prolonged, that could result in some erosion in fiscal buffers, although it expects that the government will be able to finance fiscal deficits for several years if it liquidates assets. The sovereign wealth fund Abu Dhabi Investment Authority (ADIA) alone holds an estimated $498 billion in assets as of 2014.
Abu Dhabi’s assets comfortably cover its debt level, including potential contingent liabilities related to government-related institutions, such as Abu Dhabi National Oil Company (TAQA) and IPIC, as well as other Abu Dhabi-related debt including the banking system, Abu Dhabi’s total debt represents 40.5 per cent of GDP, or about $105 billion.
The rating agency notes that Abu Dhabi’s expenditures have been rising at a quick pace: between 2008 and 2013, spending increased at a compounded rate of 15 per cent, mainly owing to an increase in federal services paid by Abu Dhabi outside of the federal budget, including on security and defence, and an increase in subsidies and transfers.
Moody’s expects that Abu Dhabi’s government will continue to derive the majority of its revenues from the oil sector, although authorities are making efforts to develop non-oil sectors, which at present account for 10 per cent of government revenues.
