|19 February, 2020

Sharjah's non-oil economy to remain 'below historical rates'

Ratings agency also warns of rising debt levels

Image used for illustrative purpose. Watefront at the Corniche by Al Mamzar Lake, Sharjah, UAE.

Image used for illustrative purpose. Watefront at the Corniche by Al Mamzar Lake, Sharjah, UAE.

Gettyimages

Sharjah will not see a significant deterioration in its fiscal position this year, but it will continue to accumulate debt, and its non-oil economy will remain weak.

“Growth in the UAE’s and Sharjah’s non-oil economy [will]] remain materially below historical rates,” Moody’s Investors Service said on Tuesday.

The ratings agency has changed the emirate’s outlook from “negative” to “stable” but downgraded the long-term currency issuer ratings to Baa2 from A3, due to rising debt burden and weaker than expected financial strength.

“A significant widening of the fiscal deficit has contributed to a much faster than expected accumulation in debt last year and, in the absence of any fiscal consolidation measures, is likely to result in a markedly higher debt trajectory over the medium term, indicating weaker fiscal strength than Moddy’s had previously estimated,” Moody’s said.

“[However,] Sharjah’s fiscal strength is unlikely to deteriorate significantly further, indicating a degree of resiliency,” it added. “

Early this week, S&P Global Ratings said it has also kept the outlook stable for Sharjah but downgraded the long-term foreign and local currency sovereign credit ratings to “BBB” from “BBB+.” 

The new ratings came shortly after the city unveiled its “largest-ever” budget for 2020 of 29.1 billion UAE dirhams, a two percent increase from the previous year’s outlay.

The northern emirate announced in January that it will increase its spending across several sectors, including infrastructure, social programs, economic activities, culture and education, among others.

This year’s budget is expected to create 500 jobs for Emiratis and stimulate economic growth.

Challenging time

Sharjah hasn’t been spared from the macroeconomic challenges and the slowdown in the UAE’s real estate and non-oil private sector.

Last year, the city saw its fiscal deficit widened to 6.1 percent of the gross domestic product (GDP), significantly higher than the 2.3 percent target. Its debt burden rose rapidly in 2019, reaching 33.6 percent of the GDP, up from 25.4 percent of GDP in 2018.

Also, receipts from land sales were substantially lower than expected in the 2019 budget, which is partly due to continued pressure on the UAE’s real estate sector. Competition among businesses within the emirate’s free zones also increased amid the slowdown in the non-oil sector and this resulted in lower transfers from Sharjah’s government-related entities.

Why the outlook is stable, yet rating is lower

Despite its challenges, Sharjah continues to benefit from a relatively diversified economy, which is more diversified than the UAE, according to Moody’s.

The emirate also benefits from relatively high incomes in global terms, above the median for Baa-rated sovereigns, although substantially lower than in neighbouring Abu Dhabi and Dubai.

Sharjah is expected to continue accumulating debt, but Moody’s said the financial strength of the city will not deteriorate significantly due to its resilience.

“Under its baseline scenario, Moody’s expects Sharjah’s debt burden to continue to increase. However, even under various negative scenarios, Moody’s does not expect the fiscal strength of Sharjah to deteriorate significantly, indicating a degree of resiliency at this rating level,” said Moody’s.

It also noted that Sharjah benefits from the UAE’s sizable foreign assets, as well as a liquid banking sector.

“Event risks stemming from Sharjah’s government liquidity risks or the UAE’s balance of payments are low in Moody’s view, given the UAE’s sizable assets. Notwithstanding the increase in recent years and likely further rise in the debt burden, a liquid banking sector, which acts as a key creditor to the emirate, supporting Moody’s view of log government liquidity risks,” said Moody’s.

(Writing by Cleofe Maceda; editing by Seban Scaria)

Cleofe.Maceda@refinitiv.com

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2020

More From Economy