Abu Dhabi retains its top credit ratings with stable outlook

Dubai: Credit rating agency Standard & Poor’s on Saturday retained Abu Dhabi’s credit rating at AA/Stable/A-1+ with stable outlook, after considering the impact of COVID-19 and the recenet sharp decline in oil prices on the economy.

“The stable outlook reflects our expectation that Abu Dhabi’s fiscal and external net asset positions will remain strong over the next two years, although structural economic and institutional weaknesses will likely persist,” Zahabia S Gupta, an analyst at S&P said in a report.

Rationale

S&P assumes an average Brent oil price of $30 per barrel (/bbl) in 2020, $50/bbl in 2021, and $55/bbl from 2022. Oil markets have been in a period of severe supply-demand imbalance since the second quarter of 2020.

“In line with our economic outlook, we anticipate a recovery of GDP and oil demand through the second half of 2020 and into 2021 as the most severe effects of the coronavirus outbreak moderate,” said Gupta.

Strong fiscal position

The ratings reflect S&P’s view of Abu Dhabi’s strong fiscal and external positions. The exceptional strength of the government’s net asset position provides a buffer to counteract the effect of oil price swings and COVID-19 on economic growth, government revenue, and the external account, as well as the effect of increasing geopolitical uncertainty in the Gulf region and the potential crystallization of contingent liabilities.

Abu Dhabi’s economy and public finances depend heavily on the hydrocarbon sector. Abu Dhabi currently derives 50 per cent of its real GDP and about 90 per cent of central government revenue from the hydrocarbon sector. This includes oil taxes and royalties, plus dividends from state-owned oil producer, refiner, and distributor Abu Dhabi National Oil Co. (ADNOC).

The rating agency expects Abu Dhabi’s oil production will decline to an average of 2.8 million bbl/day in 2020, from 3.1 million in 2019. Non-oil sectors such as real estate, trade, retail, and hospitality will also be particularly affected.

Recovery from 2021

S&P estimates a contraction in real GDP of 7.5 per cent and of nominal GDP by 22 per cent in 2020, and a gradual recovery from 2021, with real GDP averaging 2.2 per cent over 2021-2023.

“In our view, Abu Dhabi’s wealth levels mitigate the effect of weak trend growth, which we project throughout the forecast horizon, on the sovereign’s creditworthiness. We estimate Abu Dhabi’s GDP per capita at $78,000 in 2020,” said Gupta.

Abu Dhabi’s economy and public finances depend significantly on oil. Therefore, to act as a buffer against oil price volatility, the government has accumulated one of the largest net asset positions of all sovereigns we rate. Analysts expect these assets to cushion Abu Dhabi from the effect of oil price swings on economic growth, government revenue, and the external account, as well as increasing geopolitical uncertainty in the Gulf region.

In light of the lower oil prices, S&P projects a rise in Abu Dhabi’s central government fiscal deficit to about 12 per cent of GDP in 2020 from 0.3 per cent in 2019. We expect higher oil production and dividends from government enterprises will only partly offset the impact of lower oil prices.

“We anticipate that the authorities will increase capital expenditure, its stimulus program announced in 2019 (Ghadan 21 initiative), and contributions to the federal authorities to manage the economic and social impact of the COVID-19 pandemic, said Gupta.