We view the underdeveloped government institutions and the availability and timeliness of economic and demographic data in the Emirate of Ras Al Khaimah as ratings weaknesses. We consider Ras Al Khaimah's fiscal risks to be limited, due to the government's minimal spending responsibilities, its strong government balance sheet, and ongoing indirect financial support from the United Arab Emirates.

We are therefore revising our outlook on on Ras Al Khaimah to negative and affirming our 'A/A-1' ratings.

The negative outlook reflects the at least one-in-three possibility of a negative rating action over the next two years if the effectiveness and predictability of Ras Al Khaimah's government institutions and data availability remains at current levels.

On May 9, 2014, Standard & Poor's Ratings Services revised its outlook on the Emirate of Ras Al Khaimah to negative from stable. At the same time, we affirmed our 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings on Ras Al Khaimah.

We view progress in the development of Ras Al Khaimah's institutions as slow. In our view, the depth of key personnel is limited, and supporting organizational structures in some of Ras Al Khaimah's institutions are weak, which results in a lack of continuity and predictability. We consider that the availability and timeliness of demographic and economic data--including population, national income, and external accounts--is among the weakest of the sovereigns we rate, and we see this as a ratings constraint. We could therefore lower the ratings on Ras Al Khaimah if the effectiveness and predictability of Ras Al Khaimah's government institutions and data availability remains at the current levels.

The affirmation incorporates our view that Ras Al Khaimah's fiscal risks are generally limited, due to the government's minimal spending responsibilities, its strong balance sheet, and its ongoing indirect financial support from the United Arab Emirates (UAE). The UAE federal government, funded mostly by Abu Dhabi, covers most of the operating expenditures of the seven emirates, including Ras Al Khaimah, that comprise the UAE. These costs include health care, education, energy provision, and defense. Major capital costs--such as the development of schools, hospitals, trunk roads, and the provision of adequate energy generation and distribution--are also borne at the federal level. Individual emirates, including Ras Al Khaimah, have limited fiscal obligations that are primarily related to local infrastructure and services, and capital spending to develop emirate-level projects. Consequently, Ras Al Khaimah has low fiscal risks. We estimate Ras Al Khaimah's net general government asset position at about 8% of GDP in 2014-2017.

Official government statistics indicate an increase in population to 413,000 in 2010, from a previous estimate of 279,000 for that same year. We learned of the revision to the data series when it was published in the emirate's 2012 Statistical Yearbook. However, we do not consider a population increase of more than 50%--from the official population estimate of 267,000 in 2009--as realistic. We understand that the government will review the accuracy of the data over 2014-2015. Should the data be confirmed, our estimate of Ras Al Khaimah's GDP per capita in 2014 could fall to about $17,500 from approximately $24,500. However, our estimate could be offset by the possible incorporation into the nominal GDP data of Ras Al Khaimah's free trade zones. This, all things remaining equal,would likely raise overall GDP.

As per our criteria, while data on Ras Al Khaimah's balance of payments and external position is not available, we use UAE data to assess external risks in the emirate. We think that Ras Al Khaimah's external risk is limited by the UAE's extremely strong external balances, combined with its system of fiscal transfers and banking coordination. We expect the UAE's current account to show an overall surplus of about 7% of GDP in 2014-2017. Ras Al Khaimah's sole domestically controlled bank--RAKBANK, also known as the National Bank of Ras Al Khaimah--sits within the supervisory remit of the central bank of UAE. In our view, the UAE's monetary and banking union limits the external risks of the smaller emirates, including Ras Al Khaimah, and would provide a cushion in the event of an external shock.

The negative outlook reflects our view of at least one-in-three possibility that we could lower the rating over the next two years if we observed no improvement in the effectiveness and predictability of Ras Al Khaimah's government institutions and data availability. We could also lower the ratings if our estimate of Ras Al Khaimah's economic or fiscal performance weakens.

We could revise the outlook to stable if Ras Al Khaimah's economic indicators were to remain in line with our current expectations and the effectiveness of government institutions were to improve, evidenced by an increased ability to withstand the loss of key personnel without significant disruption. Furthermore, we would view increased economic diversification in areas not tied to the construction industry as positive for the ratings.

Ratings List
Ratings Affirmed; Outlook Action
                                                                      To                 From
Ras Al Khaimah (Emirate of)
 Sovereign Credit Rating                A/Negative/A-1     A/Stable/A-1

Ratings Affirmed

Ras Al Khaimah (Emirate of)
 Transfer & Convertibility Assessment   AA+               
 Senior Unsecured                       A                 

RAK Capital
 Senior Unsecured*                      A                 

*Obligor: Emirate of Ras Al Khaimah.

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© Press Release 2014