On Aug. 7, 2015, Standard & Poor’s Ratings Services affirmed its ‘AA’
long-term and ‘A-1+’ short-term foreign and local currency sovereign credit
ratings on the Emirate of Abu Dhabi, a member of the United Arab Emirates
(UAE). The outlook is stable.
RATIONALE
The ratings on Abu Dhabi are supported by its strong fiscal and external
positions, which afford it fiscal policy flexibility. The exceptional strength
of its net asset position also provides a buffer to counter the negative
impact of oil price declines on economic growth and government revenues, as
well as on the external account, notwithstanding our expectation of a
deterioration in the government’s fiscal balance.
The ratings are constrained by our assessment that the emirate has
less-developed political institutions than nonregional peers in the same
rating category. Limited monetary policy flexibility (given the UAE dirham’s
peg to the U.S. dollar), gaps and delays in the provision of economic and
fiscal data, and the underdeveloped local currency domestic bond market also
weigh on the ratings.
We assume an average Brent oil price of US$55 per barrel (/bbl) in 2015, US$65
in 2016, and US$75/bbl in 2017 and beyond. Abu Dhabi derives about 55% of its
GDP and 90% of government revenues from the hydrocarbons sector (oil taxes and
royalties, plus dividends from Abu Dhabi National Oil Co. [ADNOC]). We see Abu
Dhabi’s economy as undiversified, despite government policy to encourage
non-oil private sector growth.
Rates of real and nominal GDP growth have been robust. This has been supported
by an estimated cumulative jump in the population of 60% between 2008 and
- However, long-term real GDP per capita has contracted by about 4%
annually, largely due to the high immigration. Real GDP per capita growth is
well below that of peers in the same GDP-per-capita category. We estimate GDP
per capita atUS$62,000 in 2015, one of the highest among rated sovereigns.
There is only limited external trade, balance of payments, and international
investment position data available for Abu Dhabi. In line with our criteria,
we therefore base our assessment of Abu Dhabi’s external position on that of
its federation, the UAE. That is, we define the UAE as the “host country” and
use our estimates of the UAE’s external position as a starting point. We then
adjust the initial assessment downward due to data gaps, which, in our view,
reduce the visibility of external risks. That said, our estimates of Abu
Dhabi’s significant external assets, held by the Abu Dhabi Investment
Authority (ADIA), and including our estimate of ADIA investment income, lead
us to assess the overall external position as a strength. Using our narrow net
external debt metric, we expect the UAE’s external creditor position will
average about 118% of current account receipts (CARs) in 2015-2018, albeit on
a declining trend over the period. We estimate the UAE’s gross external
financing needs at about 107% of usable reserves of the UAE central bank and
CARs on average over the same period.
Our estimate of the government’s fiscal balance does not include our estimate
of ADIA investment income. We understand these funds are held and re-invested
by ADIA. However, we estimate the general government balance including ADNOC
dividends. We base our estimate of ADNOC dividends extrapolating from
historical data up to 2012. On this basis, we project the fiscal balance will
turn to deficit of about 1.5% of GDP on average in 2015-2018. We previously
expected a surplus of 2% of GDP over the same period. We expect government
spending to fall by about 28%, with the lion’s share coming from cuts to Abu
Dhabi’s contribution to the federal government (33% of government spending in
2014, falling to 30% in 2015), and aid payments and grants (19% of government
spending in 2014, falling to 10% in 2015). We expect development spending will
support economic growth and increase to about 10% of total expenditures in
2015 from 6% in 2014. Nevertheless, we project consolidated government
revenues to fall by about 29% in 2015, resulting in an overall deficit.
The Abu Dhabi government has made some progress with subsidy reform, which we
expect to support the fiscal balance. It cut utility subsidies from the
beginning of this year. We estimate that electricity and water subsidies could
be reduced by about 0.5% of GDP in 2015 as a result.
On July 21, 2015, the UAE federal government announced a change to the policy
of fixed fuel prices, which will affect Abu Dhabi and the other emirates. From
Aug. 1, petrol prices are set in accordance with global oil price benchmarks
(after adding transportation, operation, and distribution costs). This has
resulted in a 24% increase in standard petrol prices (Super 98) to UAE dirham
(AED) 2.14 (US$ 0.58) from AED1.72. Diesel prices, which were artificially
high to help pay for the petrol subsidy, fell to AED2.05 (US$0.56), a 29% drop
from AED2.9. We expect some modest inflationary impact from the new policy. It
remains to be seen how much of any future oil price rises will be passed on to
consumers. We understand that these subsidies were covered by losses at the
distribution company level, and largely met by ADNOC, the state-owned oil
producer, refiner and distributor. We therefore expect only an indirect impact
on the Abu Dhabi budget through higher dividends paid to the Abu Dhabi
government by ADNOC than would otherwise have been the case.
We expect the emirate will maintain its net fiscal asset position, which we
project at about 270% of GDP over 2015-2018. This is the second-highest net
government asset ratio among the sovereigns Standard & Poor’s rates, surpassed
only by Kuwait’s. The government has strengthened its oversight of
public-sector debt, aiming for sustainability and the prevention of financial
stress at its government-related entities (GREs). We estimate the debt of Abu
Dhabi’s GREs at about 25% of GDP in 2015, including parent-level debt at
Mubadala Development Co., International Petroleum Investment Co., Tourism
Development and Investment Co., and Abu Dhabi National Energy Co. These
entities are backed by the government’s statement of support to the effect
that their creditworthiness should not be differentiated from that of the
government.
The government has made some progress in strengthening its economic
institutions. It has established a debt management office, undertaken a public
expenditure review, and set up a medium-term budget framework. However, in our
view, there are substantial shortcomings and material gaps in the
dissemination of macroeconomic data, including relatively weak transparency
and reporting delays. Disclosure related to the government’s external assets
is limited compared with that of similarly rated peers. Moreover, we believe
political institutions in the UAE are at a nascent stage of development
compared with those of nonregional peers. The decision-making process remains
highly centralized, with checks and balances between institutions largely
absent.
Through its regional and international alliances, the UAE government strives
to maintain a balanced foreign policy to safeguard both its strategic and
commercial interests. We believe trade and investment between Abu Dhabi and
Iran could benefit from a lifting of sanctions on Iran. These benefits could
begin as early as the first half of 2016, conditional on the International
Atomic Energy Agency verifying that Iran has shrunk its nuclear program, is
cooperating with regard to past weaponization studies, and facilitating access
to nuclear sites. In its energy and foreign policy, Abu Dhabi has been
proactively mitigating its exposure to geopolitical risks as well as securing
its oil supply to strategic end users. To this end, the government completed
the Abu Dhabi Oil Pipeline in 2012, which now has the capacity to deliver just
over 65% of Abu Dhabi’s oil exports directly to the Fujairah terminal on the
Indian Ocean, bypassing the Strait of Hormuz. We do not expect material
spillover effects on Abu Dhabi from the conflict in Syria.
OUTLOOK
The stable outlook on Abu Dhabi reflects our view of balanced risks to the
ratings over the next two years. We believe that Abu Dhabi’s economy will
remain resilient and its fiscal policy will remain prudent, but we also
anticipate continued structural and institutional weaknesses.
We could consider raising the ratings if we observed pronounced improvements
in data transparency, including on fiscal assets and external data, alongside
further progress in institutional reforms. What’s more, measures to improve
the effectiveness of monetary policy, such as developing domestic capital
markets, could be positive for the ratings over time.
We might consider a negative rating action if we expected a deterioration in
Abu Dhabi’s currently very strong fiscal balance sheet and net external asset
position. Should fiscal deficits or the materialization of contingent
liabilities lead to a drop in liquid assets to below 100% of GDP, downward
pressure on the ratings would mount. A negative rating action could also be
possible if domestic or regional events compromised political and economic
stability.