OVERVIEW
- The Abu Dhabi government's large net asset position continues to provide a considerable buffer to mitigate the impact of commodity market volatility on the economy.
- We are therefore affirming our 'AA/A-1+' sovereign credit ratings on Abu Dhabi.
- The stable outlook reflects our expectation that Abu Dhabi's economy will remain resilient and its fiscal reserves well above 100% of GDP, although we also anticipate continued structural and institutional weaknesses.
RATING ACTION
On Aug. 5, 2016, S&P Global Ratings 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 are supported by Abu Dhabi's strong fiscal and external positions.
The exceptional strength of the government's net asset position 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.
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 expect the emirate will maintain its extremely strong net fiscal asset position, which we project at about 260% of GDP on average over 2016-2019.
This is one of the highest net government asset ratios among the sovereigns we rate. We have recently amended our approach to estimating Abu Dhabi Investment Authority (ADIA)'s investment income. Our estimates now reflect the 20-year annualized return of 6.5% published in ADIA's 2015 review, rather than the 30-year annualized return of 8.4% from 2014. We previously projected the government's net asset position over 2016-2019 at 320% of GDP.
Despite the recent decline in oil prices, Abu Dhabi maintains one of the highest GDP per capita levels in the world, and its very strong net government asset position, mostly in foreign currency, makes the emirate's economy resilient to shocks in the commodity market. We estimate Abu Dhabi's GDP per capita at about $68,000 in 2016. The average change in real GDP per capita, weighted as per our criteria, will likely show a contraction of about 3% on average in 2016-2019, largely due to high levels of immigration. We estimate that the population increased by 70% between 2008 and 2015 to 2.8 million, and will reach about 3.5 million by 2020. Real GDP per capita growth is well below that of peers in the same GDP-per-capita category. But, in our view, wealth levels in the economy could substantially cushion potential risks. Abu Dhabi's nominal GDP fell by about 14% in 2015, due to the sharp drop in oil prices.
Nevertheless, the real economic growth rate, at 6%, was much stronger than the previously expected 2%, as oil production increased.
In 2015, Abu Dhabi derived about 50% of its real GDP and 80% of government revenues from the hydrocarbons sector: oil taxes and royalties, plus dividends from state-owned oil producer, refiner, and distributor Abu Dhabi National Oil Co. (ADNOC). We assume an average Brent oil price of $46 per barrel (/bbl) in 2016-2019. In our view, government policy to encourage the economic contribution of the non-oil private sector is likely to have a significant effect only over the medium to long term.
With revenues declining by 21% due to falling oil and gas income, we estimate the general government deficit will widen to 5% of GDP in 2016, from around 4% in 2015, based on the government's preliminary approved budget. Our estimate of the government's fiscal balance does not include our estimate of investment income from ADIA. We understand these funds are held and re-invested by ADIA.
However, we estimate the general government balance including ADNOC dividends.
The government has yet to agree on a 2016 budget and currently limits spending to one-twelth of the 2015 budget per month. Nevertheless, we assume that upcoming budgets will include further measures to contain expenditures in light of the low oil price. We project Abu Dhabi's fiscal balance will show a deficit of about 4% of GDP on average in 2016-2019.
The Abu Dhabi government has made some progress with subsidy reform, which we expect will support the fiscal balance over the next few years. It cut utility subsidies in 2015, and the UAE federal government announced a change to the policy of fixed fuel prices, which affected Abu Dhabi and the other emirates.
From Aug. 1, 2015, petrol prices have been set in accordance with global oil price benchmarks (after adding transportation, operation, and distribution costs). We understand that these fuel subsidies were covered by losses at the distribution company level, and largely met by ADNOC. We therefore expect only an indirect impact on the government's budget through dividends that ADNOC pays to Abu Dhabi. Between August 2015 and July 2016, petrol and diesel prices fell by about 17% and 10%, respectively, suggesting that the positive impact on ADNOC's profitability of the adjusted subsidy regime will be offset to some extent by the decline in oil prices in the short term.
The government's oversight of the public sector aims for sustainability and the prevention of financial stress at government-related entities (GREs). We estimate the debt of Abu Dhabi's GREs at about 30% of GDP in 2016, including parent-level debt at Mubadala Development Co., International Petroleum Investment Co., and Tourism Development and Investment Co. These entities are backed by the government's 2010 statement of support, most recently reiterated to us by senior officials this year and restated in the prospectus for its May 2016 $5 billion notes issuance. We anticipate that in the event of financial distress, the smaller emirates would receive extraordinary financial support from the UAE (with Abu Dhabi's backing), although we do not expect that the need will arise. However, even taking this potential exposure into account, which we estimate at around 30% of GDP (summing our estimates of the outstanding direct debt of the governments of Dubai, Ras Al Khaimah, and Sharjah), we assess Abu Dhabi's contingent liabilities as limited in relation to the strength of the government's net asset position.
Despite some progress in strengthening its economic institutions, in our view, the emirate has weaker political institutions and lower disclosure standards than nonregional peers in the same rating category. 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 in 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 economic and financial sanctions on Iran by the E.U. and U.S. in January 2016. 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 about 50% 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 conflicts in Yemen and Syria.
There are only limited external trade, balance of payments, and international investment position data available for Abu Dhabi. 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 ADIA and including our estimate of ADIA's investment income, lead us to assess the emirate's overall external position as a strength. Using our narrow net external debt metric, we expect the UAE's external creditor position will average about 105% of current account receipts (CARs) in 2016-2019, albeit on a declining trend over that period. We estimate the UAE's gross external financing needs at about 110% of usable reserves of the UAE central bank and CARs on average over the same period.
We expect the UAE's exchange rate peg to remain in place over the next several years. In our view, the UAE has more than sufficient reserves to defend the peg, while considerations of macroeconomic and social stability would also outweigh the potential benefits of amending the exchange rate regime (see " Middle East And North Africa Sovereign Rating Trends 2016," published Jan. 18, 2016, on RatingsDirect).
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© Press Release 2016