(MENAFN- Capital Intelligence Ltd) Rating Action
Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Long-Term Local Currency Rating (LT LCR) of the United Arab Emirates (UAE) at ‘AA-’. The sovereign’s Short-Term Foreign Currency Rating (ST FCR) and Short-Term Local Currency Rating (ST LCR) have been affirmed at ‘A1+’. The Outlook for the ratings remains Stable.
Rating Rationale
The ratings reflect the continued strength of the country’s external position, which is characterised by the availability of substantial financial assets. The ratings are also supported by the stable domestic political situation and high GDP per capita. In addition, they reflect CI Ratings’ expectation that the oil rich emirate of Abu Dhabi would be willing to support federal institutions in the unlikely event of financial distress.
The UAE’s external accounts remain strong. The current account is expected to have remained in a healthy – albeit smaller – surplus of 3.6% of GDP in 2020, compared to 8.4% in 2019. This decline is mainly attributable to the negative repercussions of Covid-19 on oil exports and tourism. The current account balance is expected to recover in 2021-22, averaging at 8% of GDP, as current account receipts start to rebound. Official foreign exchange assets declined slightly to USD98.5bn in 2020, compared to USD108.3bn in 2019, as the central bank drew down its reserves in order to mitigate the economic fallout from Covid-19 and to partially cover the country’s external financing needs. Even so, reserves continue to fully cover short-term external debt on a remaining maturity basis. Although there is limited disclosure on the assets of sovereign wealth funds, it is estimated that the Abu Dhabi Investment Authority (ADIA), the largest of the UAE funds, has around USD710bn under management. This is three times the size of the country’s total external debt (as estimated by the IMF) and equivalent to around 200% of 2020 GDP. While the net creditor position of the country cannot be taken as a solvency risk indicator of individual emirates, CI expects that Abu Dhabi, being the wealthiest emirate, would provide financial assistance to the federal government and/or the central bank if required.
Marred by lower oil production and the adverse impact of Covid-19, the UAE economy is expected to have contracted by 6.6% in 2020, compared to growth of 1.7% in 2019. Economic activity started to partially recover during the second half of 2020 following the waiver of lockdowns and the resumption of international travel and trade. However, the recovery was not as robust as expected due to the second wave of Covid-19 and the weak global economy. In response to the pandemic, the government implemented a stimulus programme to the tune of USD7.2bn (2% of GDP) to support social welfare and shore up small businesses in 2020. CI forecasts that the economy will grow by 1.3% in 2021 and by 2.2% in 2022; however, the short- to medium-term outlook remains subject to Covid-19 related risks, including the pace of the recovery in global trade, hydrocarbon demand, as well as tourism. Consumer prices declined by a further 1.5% in 2020 and inflation is expected to be manageable in 2021-22.
The public finances deteriorated last year, with the consolidated budget position (which is dominated by Abu Dhabi and Dubai) expected to have posted a deficit of 10% of GDP, compared to a deficit of 1.8% in 2019. The increase in the deficit was the direct result of declining revenues, higher current spending, and significantly lower oil prices. Assuming an average oil price of USD45 per barrel, the consolidated budget deficit is expected to narrow to 3.8% of GDP this year and to 2.5% in 2022, provided that the government unwinds the temporary fiscal measures that were introduced in 2020 (the UAE’s fiscal breakeven oil price is estimated by the IMF to be about USD67 per barrel). The consolidated government debt stock is expected to remain moderate at 38.2% of GDP in 2021 as the government is expected to cover much of its financing needs by drawing down financial assets.
At present, government refinancing risks – whether on a federal or emirate level – are deemed limited due to moderate gross financing needs of around 9.8% of GDP in 2021. Access to international markets remains strong, with the emirate of Abu Dhabi twice tapping markets in 2020, issuing USD12bn of eurobonds at favourable terms and long maturities. Nonetheless, higher regional political risk and/ or higher international interest rates could trigger higher refinancing costs. In this context, Dubai GREs would be most exposed to refinancing risks given their relatively large debt stock (which together with the Dubai government’s debt is estimated to have exceeded 140% of the emirate’s GDP in 2020) and sizeable debt repayment schedule in the coming years. Additionally, the Dubai economy is expected to have contracted by around 11% last year, aggravating the financing costs of these GREs.
The UAE’s sovereign ratings are mainly constrained by the relative dependence on hydrocarbons and budget rigidities. Oil and gas still account for around 40% of consolidated government revenue and for almost one third of GDP. The budget structure is weakened by high expenditure rigidities. The ratings also continue to be constrained by geopolitical uncertainties arising from the tension with Iran. However, geopolitical risk factors are expected to stabilise following the end of the dispute with Qatar.
The quality of economic data is relatively weak, although slowly improving. Fiscal accounts are not comprehensive but fiscal data disclosure at the consolidated level has started to improve; accounts are now compiled more in line with international standards. However, information on government external financial assets is not disclosed, hindering assessments of balance sheet strength and flexibility.
Rating Outlook
The Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months. The outlook balances the UAE’s strong net external asset position against weaker budget performance and increasing financing risks of Dubai’s GREs.
Rating Dynamics: Upside Scenario
Although not considered likely in the next 12 months, the ratings could be upgraded if the government embarks on structural reforms which reduce its reliance on oil exports and improve the institutional framework, and if geopolitical tensions decline markedly.
Rating Dynamics: Downside Scenario
The ratings could be lowered if geopolitical tensions escalate, global oil prices decline considerably, the public and external finances deteriorate, or the financing risks of Dubai’s GREs increase significantly.
Contact
Primary Analyst: Dina Ennab, Sovereign Analyst, E-mail: dina.ennab@ciratings.com
Secondary Analyst: Yesenn El-Radhi, Senior Sovereign Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
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