Abu Dhabi: Moody’s Investors Service, the credit rating agency, confirmed on Saturday, Abu Dhabi’s ratings at Aa2 and assigned a negative outlook citing uncertainty around the implementation of policy responses to the oil price shock.
The agency said that the rating confirmation was mainly due to Abu Dhabi’s “very large fiscal buffers in the form of diversified offshore investments, which will support economic and fiscal resilience during a period of lower oil prices and subdued growth.”
The rating confirmation came on the same day Moody’s downgraded the ratings of Saudi Arabia, Oman and Bahrain.
Moody’s said such buffers will allow the emirate’s government time to adjust its fiscal policy to the lower oil prices and help it cope with challenges in the economic environment.
“The sharp decline in oil prices has delivered a significant shock to Abu Dhabi’s fiscal trend, causing the consolidated balance to record a large deficit in 2015 and going forward. As oil and gas accounted for almost half of the emirate’s budget revenue in 2015, Moody’s expects Abu Dhabi’s fiscal accounts to deteriorate to a deficit of nine per cent of GDP (Gross Domestic Product) in 2016,” the agency said.
In its statement, Moody’s also said it anticipates an increase in Abu Dhabi’s debt-to-GDP ratio, which in 2015 was around two per cent of GDP, to level off at less than 10 per cent of GDP by 2019.
Reserve funds and debt
The near-10-per cent figure is based on the assumption that Abu Dhabi’s deficit will be financed equally by reserve funds and debts, which would be a change to the 2015 strategy when the deficit was financed domestically through the withdrawal of cash deposits.
“The rating agency considers the subsidy reforms and increases in non-oil revenue, including the introduction of value-added tax in 2018 to be credit positive, but believes that their fiscal impact is small relative to the size of fiscal challenges,” Moody’s said.
Sanyalaksna Manibhandu, director of research at the National Bank of Abu Dhabi Securities, said that despite the “negative outlook”, it was still a positive to see the emirate’s rating being affirmed.
“What they’re worried about is crude prices being this low going forward, but if and when the rating agencies change their outlook on crude prices, then quite possibly the UAE might not only escape a downgrade but might have its outlook improved. Whether it’s Moody’s, S&P, or Fitch, they’re looking at crude prices as the key driver of their rating action.
Yes, crude prices have rebounded from a low, but not to a point where they’re near fiscal break even points just yet, and the IMF (International Monetary Fund) said that the fiscal break even point for Saudi and the UAE is around $70 [Dh257], which is higher than we are now,” he said.
Manibhandu added that even with the UAE’s latest diversification policies, such strategies will only help on the medium and long-term but not on the short term (next two years).
As part of the rating action, Moody’s also confirmed the long-term senior unsecured rating at Aa2/(P) Aa2 ad affirmed the short-term senior unsecured rating a (P) P-1.
