Dubai: Strong economic fundamentals support UAE’s sovereign credit strength according to Moody’s which has assigned a credit rating of Aa2 and had upgraded the credit outlook from negative to stable recently.
The global credit rating agency said its recent change in outlook for the UAE economy was in response to effective policy response to the low oil price environment via an acceleration in the country’s reform agenda and the ongoing recovery in the fiscal and current account balances. The UAE recorded a strong economic growth of 3 per cent last year despite low oil prices.
“Superior infrastructure supporting diversification, very high per capita income and hydrocarbon reserves of more than 70 years at the current rate of production also support creditworthiness. In addition, the UAE’s domestic politics have a track record of stability and the country has strong international relations,” said Mathias Angonin, a credit analyst with Moody’s.
Analysts say the UAE’s main credit challenge relates to weaker economic and fiscal metrics caused by the oil price shock and the country’s fiscal reliance on hydrocarbons with 48 per cent of government revenue in 2016 coming from this sector.
According to the rating agency, further improvements in policy and data transparency in the UAE and improved diversification efforts would support upward revision of the rating outlook.
High income levels, resource endowment and competitiveness underpin UAE’s economic strength. “We assess the UAE’s economic strength as ‘very high’ reflecting its very high income level, moderately large size, abundant hydrocarbon reserves with low cost of extraction, vibrant non-oil economy, and well-developed infrastructure,” said Angonin.
The hydrocarbon sector is projected to make a smaller contribution to real growth in 2017 because of the recent Opec decision to freeze production. Average daily production levels reported by the government dropped 6 per cent quarter-on-quarter in the first quarter of this year. However, the crude oil production outlook is largely resilient to volatility in oil prices as very low extraction costs of UAE producers ensure economic viability of new and existing projects.
The UAE’s non-oil growth decelerated again in 2016 to 2.7 per cent from 3.2 per cent in 2015 and 4.6 per cent in 2014. This relative slowdown is likely to extend into 2017, followed by a gradual recovery in 2018-2020.
“Supporting growth in the non-oil economy will be government spending — after two years of spending cuts, we expect consolidated government spending to increase in 2017. In Dubai, mega-projects will continue to support non-residential construction activity, which will accelerate in the years leading to the 2020 World Expo,” Angonin said.
