Moody's affirms Abu Dhabi's Aa2 rating; maintains the stable outlook

Singapore: Moody's Investors Service ("Moody's") has today affirmed the long-term issuer and senior unsecured ratings of the Government of Abu Dhabi at Aa2. The outlook remains stable. Moody's has also affirmed the short-term issuer rating at P-1, and the long-term and short-term MTN programme ratings at (P)Aa2 and (P)P-1, respectively.

The affirmation of Abu Dhabi's Aa2 ratings is supported by Moody's expectations that the sovereign's fiscal strength will remain very high,  with very low government debt and vast sovereign assets. Prospects for a medium-term increase in economic activity and revenue from the hydrocarbon sectors and reforms aimed at developing the non-oil sector also support the ratings.

The stable outlook indicates that the risks are broadly balanced, supported by current oil prices and upside potential from continuing  diversification efforts, and constrained by lingering government-related entity contingent liabilities and geopolitical tensions.

RATINGS RATIONALE 

RATIONALE FOR AFFIRMING THE Aa2 RATING

VERY HIGH FISCAL STRENGTH, WITH VERY LOW GOVERNMENT DEBT AND VAST SOVEREIGN WEALTH FUND ASSETS 

Moody's expects Abu Dhabi's fiscal strength to remain very high, with very low government debt and vast financial assets.

Moody's estimates that Abu Dhabi's budget was close to balance in 2018. Over the medium-term, under the assumption that oil prices hover around the current levels, after a small deficit in 2020 the budget balance will  likely move to a small surplus as Abu Dhabi increases hydrocarbon production in line with its investment plans. As a result, Moody's forecasts Abu Dhabi's debt/GDP to remain under 10% in the foreseeable future despite a likely shift in policy focus towards supporting the economy from fiscal consolidation.

After a period of fiscal restraint following the oil price shock, government spending has started to rise more rapidly. In addition to last year's easing of spending constraints, in May 2018 Abu Dhabi announced plans to implement a $13.6 billion (AED50 billion, around 5% of GDP) stimulus package ("Ghadan 21/Tomorrow 21") which will be spread over a period of three years, starting in 2019.

These relatively modest increases in spending have been matched by more significant increases in hydrocarbons revenues, predominantly due to higher oil prices but also by modest increases in production. Hydrocarbon revenues aside, the implementation of VAT in January 2018 has also 
expanded the government's non-oil revenue base, although the disbursement of these receipts is pending agreement on the distribution formula among the Emirates, which collectively will receive 70% of VAT receipts.

Underpinning Abu Dhabi's very high fiscal strength is the government's exceptionally strong balance sheet, with assets under management at the Abu Dhabi Investment Authority (ADIA) that Moody's estimates at more than $590 billion as of 2018 far exceeding the total liabilities in the wider 
public sector. As a result, Moody's assesses that the contingent liability risks posed by government-related entities (GREs) are modest in comparison to Abu Dhabi's sovereign wealth fund assets, and estimates that total GRE liabilities in the UAE amounted to around 28% of ADIA's assets.

FURTHER DEVELOPMENTS IN HYDROCARBONS AND REFORMS SUPPORTING THE NON-OIL ECONOMY POINT TO ROBUST GROWTH

The re-imposition of OPEC production cuts late last year has constrained the near-term outlook for hydrocarbons production in Abu Dhabi, although a ramp up in production just prior to the announcement of the cuts has  resulted in a production allocation for 2019 which is slightly larger 
than last year's production, meaning that Moody's expects hydrocarbon real GDP will still post a positive contribution to growth.

Notwithstanding these near-term production constraints, Abu Dhabi National Oil Company (ADNOC) has announced $132 billion of new investment plans in downstream and upstream sectors. If fully executed these investments will lift daily production capacity by to 4 million barrels per day by 2020, compared to production levels of around 3 mbpd in 2018, supporting both economic activity and government revenues. Around $45 billion of this investment will flow into the downstream sector to support the development of ADNOC's refining and petrochemicals capacity, an important sector for Abu Dhabi's economic diversification efforts. Recent initiatives to tap Abu Dhabi's sour gas reserves will also eventually reduce the sovereign's reliance on imports of gas from Qatar (Aa3 stable) as they start to come online from 2025 onwards. 

Moreover, in response to the weaker growth environment of the last few years, the government's focus has shifted away from fiscal consolidation towards economic reforms which Moody's expects willgradually support the development of the non-oil sector although Abu Dhabi's economy will 
continue to be dominated by the hydrocarbon sector for the foreseeable future.

The government measures include a number of changes at the federal levelto the investment and visa frameworks, aimed at facilitating inwards investment. The Foreign Direct Investment law came into force in September 2018, which provides the UAE Cabinet with the ability to remove the 49% ownership restriction for foreign onshore investment in selected sectors of the economy. Changes to the UAE's visa framework to provide long-term (five and 10 year residency visas) for investors as well as to key specialist professionals and exceptional students came into effect in March 2019. To the extent that these visa changes reduce fluctuations in the expatriate population they will support demand for residential real estate and domestic economic activity in general.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook indicates that the risks to the ratings are broadly balanced.

Fluctuations in oil prices will continue to affect Abu Dhabi's fiscal
metrics but unless oil prices depart significantly and durably from 
Moody's assumption that prices will hover around the current levels, the
credit implications of such changes in prices will be limited.

Over the longer term, effective implementation of the government's plans 
would foster increasing diversification of economic activity, allowing 
the government to broaden its revenue base and limiting the need for 
government support to the economy during periods of lower oil prices.

Downside risks relate to a potential significant worsening in the 
financial health of GREs leading to large financial support from 
government of Abu Dhabi. Moreover, geopolitical risks -- primarily 
relating to regional tensions with Iran, including through the war in 
Yemen -- remain a source of low-likelihood but potentially high impact 
downside risk should an escalation lead to disruptions, for example 
through the Strait of Hormuz, that affect the whole region. However, the 
UAE's Habshan-Fujairah pipeline mitigates the impact of this risk 
compared to some other GCC sovereigns.

WHAT COULD TAKE THE RATING UP/DOWN

Although the threshold for an upgrade is high at this rating level,
prospects of significant diversification of economic activity from 
hydrocarbons and an associated decline in the government's dependence on 
hydrocarbons revenues would likely prompt an upgrade of Abu Dhabi's 
rating. A more positive assessment of Abu Dhabi's creditworthiness would
also involve greater transparency over fiscal policy and the size and
composition of government assets, and declining contingent liability
risks from GREs.

Conversely, a prolonged period of oil prices well below Moody's current 
assumptions would likely prompt a rating downgrade if not accompanied by 
effective measures to preserve the government's fiscal strength. A rising 
probability that large contingent liabilities posed by government-related
entities may crystallise on the government's balance sheet would also
likely prompt Moody's to downgrade the rating.

GDP per capita (PPP basis, US$): 127,679 (2017 Actual) (also known as Per 
Capita Income)

Real GDP growth (% change): -0.5% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.2% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -4.1% (2017 Actual) (also known as 
Fiscal Balance)

Level of economic development: Very High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded 
since 1983.

On 20 March 2019, a rating committee was called to discuss the rating of 
the Abu Dhabi, Government of. The main points raised during the 
discussion were: The issuer's economic fundamentals, including its 
economic strength, have not materially changed. The issuer's
institutional strength/ framework, have not materially changed. The 
issuer's fiscal or financial strength, including its debt profile, has 
not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings 
published in November 2018. Please see the Rating Methodologies page on 
www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.

The local market analyst for this rating is Thaddeus Best, +971 (423) 
795-06 .

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this 
announcement provides certain regulatory disclosures in relation to each 
rating of a subsequently issued bond or note of the same series or 
category/class of debt or pursuant to a program for which the ratings are 
derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider, this 
announcement provides certain regulatory disclosures in relation to the 
credit rating action on the support provider and in relation to each 
particular credit rating action for securities that derive their credit 
ratings from the support provider's credit rating. For provisional 
ratings, this announcement provides certain regulatory disclosures in 
relation to the provisional rating assigned, and in relation to a 
definitive rating that may be assigned subsequent to the final issuance 
of the debt, in each case where the transaction structure and terms have 
not changed prior to the assignment of the definitive rating in a manner 
that would have affected the rating. For further information please see 
the ratings tab on the issuer/entity page for the respective issuer on 
www.moodys.com.

For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action, and 
whose ratings may change as a result of this credit rating action, the 
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures, if 
applicable to jurisdiction: Ancillary Services, Disclosure to rated 
entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit 
rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to 
the lead rating analyst and to the Moody's legal entity that has issued 
the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com 
for additional regulatory disclosures for each credit rating.

Christian de Guzman
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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Singapore
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Client Service: 852 3551 3077

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© Press Release 2019