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Abu Dhabi staunch in the face of crisis
Abu Dhabi is the economic powerhouse of the UAE, its prosperity founded on abundant hydrocarbon resources that generate around 60 per cent of the emirate's GDP.
- By Tristan Cooper
- Published: 23:47 January 9, 2009
Abu Dhabi is the economic powerhouse of the UAE, its prosperity founded on abundant hydrocarbon resources that generate around 60 per cent of the emirate's GDP.
Despite its concentration on oil and gas, the steep fall in international oil prices poses little threat to the emirate's credit standing, thanks to its robust public finances. Moody's estimates that Abu Dhabi's fiscal break-even oil price is around $30 per barrel, considerably below even today's depressed prices.
Even if oil prices were to fall below $30 per barrel, the Abu Dhabi Government could afford to run sizeable fiscal deficits for many years given its stockpile of financial assets.
These assets - mostly managed by the Abu Dhabi Investment Authority - are held offshore in a range of instruments including blue chip equities, bonds and real estate and are understood to be worth more than twice the value of the emirate's projected 2008 GDP (i.e. more than $280 billion), even after accounting for the 2008 slump in global equity markets.
Although the government currently has very little direct or guaranteed debt, its domestic contingent liabilities are extensive.
Given its economic dominance and leadership role within the UAE, Abu Dhabi would be very likely, in Moody's opinion, to provide financial support either directly or indirectly to other emirate governments and systemically important banks and government-owned companies in the UAE if they were faced with difficulties that threatened the reputation or economic health of the country.
Having said that, it is unlikely that these contingent liabilities, which have a range of maturities, would all hit the balance sheet of the Abu Dhabi Government.
Most government-owned companies and banks in the country are profitable, well-managed and have significant net assets. Even under a plausible worst-case scenario, the potential liabilities of the Abu Dhabi Government could be amply covered by its assets.
Of course, the fall in oil prices is not the only way in which the global economic crisis has affected the emirate's financial position - especially given the government's ongoing efforts to diversify the economy away from hydrocarbons.
Non-oil sectors have flinched as financing has become more difficult given a shortage of liquidity among local and international banks and confidence has been hit by the steep fall in the local equity market and a softening of real estate prices.
Nevertheless, Abu Dhabi is better placed than other emirates and most other countries to push through the global economic downturn given the might of its finances.
Reassuringly, Abu Dhabi has a long history of domestic political stability and enjoys strong relations with its fellow emirates within the UAE, most neighbouring countries, and the major global powers.
Abu Dhabi's wide fiscal surplus and copious offshore financial assets remain the main pillars supporting the emirate's high sovereign ratings of Aa2/ Prime-1.
The writer is vice-president/senior analyst, Sovereign Risk Group, Moody's Middle East Ltd
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