United Arab Emirates – Sovereign Ratings Affirmed with a Stable Outlook

(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 LT Local Currency Rating (LT LCR) of the United Arab Emirates (UAE) at ‘AA-’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term FCR (ST FCR) and ST LCR at ‘A1+’. The Outlook for the ratings remains Stable.

Rating Rationale

The ratings reflect the strength of the UAE’s consolidated fiscal and external positions, and CI’s expectation that these will remain strong throughout the forecast period provided that geopolitical risk factors do not increase. The ratings also reflect our view 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 stable domestic political environment, very high GDP per capita, sound banking system, and the government’s ongoing efforts to diversify the economy and improve the consolidated budget structure also support the ratings.

The ratings are mainly constrained by the relative dependence on hydrocarbon revenues, budget rigidities and high geopolitical risk factors. Oil and gas accounted for around 40% of consolidated government revenues and 24.5% of GDP in 2024. Both the federal and consolidated budget structures are weakened by high expenditure rigidities. Furthermore, the UAE is exposed to significant geopolitical risk due to the wars in Gaza and Yemen, and the continued tension between Israel and Iran despite the ceasefire agreement that was reached in June 2025.

The country’s external accounts remain very strong, supported by the main emirates, especially Abu Dhabi. The current account surplus remained very high in 2024 despite narrowing to 9.1% of GDP, from 10.7% in 2023, and CI expects the current account to register an average surplus of 6.5% of GDP in 2025-27. This is based on our expectation that hydrocarbon exports will gradually pick up, while non-hydrocarbon exports of goods and services will remain robust over the period. Notwithstanding the above, risks to the external outlook stem from the war in Gaza and the continued tension in the Red Sea and Arabian Gulf between Israel, the United States and Iran. A renewed military escalation between Israel and Iran could potentially disrupt hydrocarbon trade and production, as well as adversely affect investor sentiment and tourism receipts. The materialisation of such a high-impact event would likely have adverse implications for the ratings, but has not been incorporated into our baseline scenario. Other risks could stem from slower-than-projected growth in the UAE’s major trading partners, which in turn would reduce demand for hydrocarbons and adversely affect tourism revenues.

International liquidity is high. Official reserves are adequate and increased to USD258.5bn in March 2025, from USD238.2bn in December 2024, with the latter covering 186.1% of external debt falling due this year. However, the assets of the country’s various sovereign wealth funds are much larger, although disclosure is limited. It is estimated that the Abu Dhabi Investment Authority, the largest of the UAE sovereign wealth funds, had around USD1,110bn of assets under management in 2024. While the UAE’s net external creditor position cannot be taken as a solvency risk indicator for the individual emirates, CI expects that Abu Dhabi – the wealthiest emirate – would provide financial assistance to the federal government, including the Central Bank of the United Arab Emirates, in the event of need.

The public finances remain very strong, largely fuelled by high hydrocarbon revenues. The consolidated budget position (which is dominated by Abu Dhabi) is very strong, with an estimated surplus of 3.6% of GDP in 2025 (5.6% in 2024). Moving forward, the consolidated budget surplus is expected to post an average of 4.0% of GDP in 2026-27 – assuming an average oil price of USD60.0/barrel – supported by robust non-hydrocarbon revenues. Reflecting very large primary surpluses, the consolidated government debt stock is expected to have declined slightly to 32.1% of GDP in 2024, from 32.4% in 2023.

At present, consolidated government refinancing risks are low given the relative size of the budget surplus. Abu Dhabi and Dubai’s access to capital markets remains strong, as evidenced by favourable investor sentiment and low credit default swaps (CDS) on their outstanding debt. Despite the 12-day military conflict between Israel and Iran, CDS spreads on the five-year debt of Abu Dhabi and Dubai declined to 35.5bps and 59.2bps, respectively, at the end of June 2025, compared to 42.5bps and 62.4bps at the end of December 2024. In April 2025, Dubai tapped the markets with a USD1.25bn dual tranche 30-year eurobond and sukuk, with all the issues being oversubscribed, while Abu Dhabi raised AED3.3bn locally in the form of treasury sukuk.

Contingent liabilities are deemed moderate. Dubai’s non-bank GREs are the most exposed to refinancing risk due to their relatively high debt stocks (estimated at 46.8% of the emirate’s GDP in 2024). According to the IMF, the maturing debt of all GREs is estimated at around USD15.6bn (2.8% of GDP) in 2025.

Economic performance is expected to remain upbeat in the short to medium term, supported by strong domestic activity and reform implementation under the UAE Strategy for the Future. Real GDP expanded by 4.0% in 2024 (from 4.3% in 2023), with non-hydrocarbon sectors expanding briskly. Real output is expected to expand by an average of 4.8% in 2025-27, reflecting solid non-hydrocarbon growth and recovery in the hydrocarbon sector as OPEC+ production cuts are gradually phased out in 2025. Notwithstanding the favourable growth outlook, risks could stem from lower-than-projected growth in global economies and tense geopolitical conditions. CI notes that the implementation of reforms based on the UAE Strategy for the Future could help to reduce economic risks stemming from the dependence on hydrocarbons. These in particular include measures aimed at strengthening the private sector, diversifying the economy, and further reducing labour market segmentation (the government is still the largest employer of nationals).

The banking system remains sound and is a supporting rating factor. Banks operating in the UAE are strongly capitalised, with an average capital adequacy ratio of 17.6%, Tier 1 capital ratio of 16.2%, and CET1 ratio of 14.7% as of end-March 2025. Asset quality remains satisfactory, with the average NPL ratio declining to 3.8% of gross loans at end-March 2025, from 5.0% at end-March 2024.

CI considers the quality of economic data to be comparatively weak for the rating category. Fiscal accounts are not comprehensive, but fiscal disclosure at the consolidated level has started to improve and accounts are now compiled more in line with international standards and published periodically. 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 and availability of large fiscal buffers against continued reliance on hydrocarbon exports and high geopolitical risk factors.

Rating Dynamics: Upside Scenario

The ratings could be upgraded by one notch in the next 12 months if the authorities continue to implement structural reforms that lead to a sustainable reduction in the reliance on oil exports, as well as improve institutional framework and data disclosure. Moreover, a durable and significant decline in geopolitical risk could place upward pressure on the ratings if accompanied by steady reform implementation and a decline in contingent liabilities.

Rating Dynamics: Downside Scenario

The ratings could be lowered if geopolitical tensions escalate to a level that disrupts hydrocarbon flows in the region for a prolonged period of time. Moreover, the ratings could be downgraded if refinancing risks increase significantly due to deteriorating public and external balances linked, for example, to an unexpected sharp and prolonged decline in hydrocarbon prices.

Contact

Primary Analyst: Dina Ennab, Sovereign Analyst, E-mail: ...
Committee Chairperson: Morris Helal, Senior Credit Analyst

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