Moody's Investors Service has downgraded the long-term foreign and local-currency issuer ratings and the foreign-currency senior unsecured ratings of the Government of Sharjah to Ba1 from Baa3, as it expects the emirate's fiscal strength to deteriorate over the next few years.

The ratings agency also changed the outlook on the issuer to stable from negative, indicating the risks to Sharjah's ratings are balanced.

The Ba1 rating is consistent with further fiscal deterioration that Moody's expects in the medium term.

Downside credit risks stem from the deteriorating global macroeconomic environment. Sharjah's government liquidity and external vulnerability risks stem from the tightening global financing conditions and rising interest rates. These are, however, mitigated by the financial benefits that Sharjah derives from its membership in the UAE, including the highly credible currency peg and the government's reliable access to financing from the UAE's liquid and well-capitalized banking system.

Upside risks relate to potentially positive effects from the government-led infrastructure and real-estate development projects on Sharjah's growth and from the planned introduction of the federal corporate tax on revenue.

Moody's said the ratings downgrade also applies to the backed senior unsecured debt ratings of Sharjah Sukuk Limited and Sharjah Sukuk Programme Limited. It said the "payment obligations related to the notes issued by these entities, which are fully owned by the Government of Sharjah, are direct obligations of the government and rank pari passu with other senior, unsecured debt issuances of the government."

(Writing by Brinda Darasha; editing by Seban Scaria)

brinda.darasha@lseg.com