Abu Dhabi: Credit rating agency Standard and Poor’s (S&P) has reaffirmed Abu Dhabi’s rating saying the emirate’s economy will remain resilient and its fiscal policy will remain prudent despite drop in oil prices. The outlook is stable for Abu Dhabi economy.
The ratings on Abu Dhabi are supported by its strong fiscal and external positions, which afford it fiscal policy flexibility.
“The exceptional strength of its net asset position also provides a buffer to counter the negative impact of oil price declines on economic growth and government revenues, as well as on the external account, notwithstanding our expectation of a deterioration in the government’s fiscal balance,” it said in a statement.
The government spending is expected to fall by about 28 per cent, with the lion’s share coming from cuts to Abu Dhabi’s contribution to the federal government.
“We expect development spending will support economic growth and increase to about 10 per cent of total expenditures in 2015 from 6 per cent in 2014. Nevertheless, we project consolidated government revenues to fall by about 29 per cent in 2015, resulting in an overall deficit.”
The credit rating agency described Abu Dhabi’s economy as undiversified, despite government policy to encourage non-oil private sector growth.
According to it, the emirate derives about 55 per cent of its GDP and 90 per cent of government revenues from the hydrocarbons sector (oil taxes and royalties, plus dividends from Abu Dhabi National Oil Company).
It projected an average Brent oil price of $55 per barrel in 2015, $65 in 2016, and $75 in 2017 and beyond.
Subsidy reform undertaken by the emirate is recent times is likely to benefit the economy. The government has cut utility subsidies earlier this year and starting from August 1, the UAE Ministry of Energy has scrapped fuel subsidies.
There is likely to be a modest inflationary impact due to scrapping of fuel subsidies. Petrol prices were increased by 24 per cent and diesel prices were reduced by 28 per cent.
On the other hand, trade and investment between Abu Dhabi and Iran could benefit from a lifting of sanctions on Iran. These benefits could begin as early as the first half of 2016, conditional on the International Atomic Energy Agency verifying that Iran has shrunk its nuclear programme, is cooperating with regard to past weaponisation studies, and facilitating access to nuclear sites. Experts previously have said trade figures between the UAE and Iran would double once sanctions are removed.
Standard and Poor’s believes that the economy will remain resilient and fiscal policy prudent but also anticipates continued structural and institutional weaknesses.
“We could consider raising the ratings if we observed pronounced improvements in data transparency, including on fiscal assets and external data, alongside further progress in institutional reforms.”
