Abu Dhabi can endure oil price fall

Dubai: Abu Dhabi's public finances are robust and can easily withstand the recent steep fall in international oil prices, ratings agency Moody's said yesterday.

The emirate's fiscal surplus and strong offshore financial assets are the main pillars supporting its high sovereign ratings, the agency said in its new credit report on Abu Dhabi.

The long-term foreign and local currency issuer ratings of the government of Abu Dhabi are "Aa2" while the short-term foreign and local currency issuer ratings are "Prime-1". The outlook on these ratings is stable.

"We estimate that Abu Dhabi's fiscal break-even is around $30 (Dh110.18) per barrel, considerably below today's oil price," said Tristan Cooper, a Moody's senior analyst and author of the report. 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 large stock of financial assets.

Economic health

These assets are mostly managed by the Abu Dhabi Investment Authority and are held offshore in a range of instruments including blue chip equities, bonds, and real estate.

While the full scale of these assets has not been revealed to Moody's, they are known to be worth more than twice the value of the emirate's projected 2008 GDP or more than $280 billion. This is after accounting for recent sharp declines in global equity markets.

The government of Abu Dhabi currently has very little direct or guaranteed debt but its domestic contingent liabilities in Moody's opinion are extensive.

"Given its economic dominance and leadership role within the UAE, Moody's believes that there is a high likelihood that, although not legally obligated, Abu Dhabi would 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," Cooper said.

However, Moody's pointed out, that it is unlikely that these contingent liabilities, which have a range of maturities, would all crystallise onto 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, it added.

Aside from its impact through falling oil prices, the global economic crisis has also affected the emirate's non-oil sectors.