UAE's Aa2 rating with stable outlook reflects its fiscal strength

Dubai: Credit rating agency Moody’s has assigned Aa 2 with stable outlook, the highest credit rating in the region to the UAE.

The UAE’s credit profile is supported by the assumed full backing of Abu Dhabi (Aa2 stable) and its strong balance sheet. Moody’s observed that the UAE’s fiscal strength remains robust, with a balanced federal budget and very low debt.

Stable outlook

The stable outlook indicates that the risks to the ratings are broadly balanced supported by the stable outlook on the Abu Dhabi sovereign rating, upside potential from continuing diversification efforts, and constrained by lingering government-related entity contingent liabilities and geopolitical tensions.

The Aa2 rating incorporates Moody’s view that the government of Abu Dhabi, the wealthiest of the seven emirates that comprise the UAE, stands fully behind the federal government. Accordingly, the rating of the federal government is linked to the credit profile of the government of Abu Dhabi.

“We assess the UAE’s economic strength as “aa3”, supported by an exceptionally high GDP per capita, very large hydrocarbon reserves of nearly 70 years at the current rate of production and developed infrastructure. Besides the oil windfall, a rapid expansion of the trade, tourism, and transport sectors has produced robust growth rates and boosted per capita GDP at purchasing power parity to a high level of $69,435 in 2019,” Moody’s said in a recent report.

GDP outlook

Moody’s expect real GDP growth to average 1.9 per cent between 2015 and 2024 (forecast), which outpaces most Aa-rated sovereigns. However, the headline rate of real GDP growth is heavily influenced by oil production volumes which leads to higher than average growth volatility.

Non-oil real GDP - which is a better measure of the activity of the private sector - grew by just 1 per cent in 2019 and the rating agency expects it to contract by 6.2 per cent this year on the back of the coronavirus outbreak and public health measures to contain it.

Crude oil production has also been constrained due to the periodic implementation of crude oil production cuts by the Organization of the Petroleum Exporting Countries (OPEC).

Moody’s observed that the UAE has demonstrated its institutional strength by spearheading reforms destined to improve the business environment and diversify its fiscal base.

The UAE scores “aa1” for its fiscal strength. This is above the initial score of “aa2” as the negative adjustment for debt trend in the initial score mainly relates to the post-2015 oil shock period and to 2020 on the back of the corona virus outbreak.

“We expect that this increase in debt trend will unwind as the debt burden stabilises after 2020. The consolidated fiscal accounts of the UAE are dominated by the budget of Abu Dhabi, whose finances are supported by the emirate’s very strong government balance sheet, with assets equivalent to 142 per cent of the UAE’s GDP under management by ADIA in 2019,” Moody’s said.

Contingent liabilities and support

Although the Federal government has not yet issued debt (it now has the ability to issue debt under the new federal debt law) and emirate governments have low-to-moderate debt levels, the level of government-related entities (GREs) debt remains among the highest in Moody’s rated universe relative to GDP. This debt poses contingent liability risk to Abu Dhabi’s and the UAE’s balance sheet in the event that GRE finances deteriorate.

“We believe that the federal government and/or the government of Abu Dhabi would be strongly supportive of other emirate governments and systemically important banks throughout the UAE if they were faced with serious difficulties. Our view is underpinned by the UAE’s high degree of political solidarity, its interest in protecting the economic health of the federation, and in protecting its reputation,” Moody’s said.