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Fitch Ratings-Hong Kong-November 05: Fitch Ratings has affirmed Abu Dhabi's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Abu Dhabi's key credit strengths are its strong fiscal and external metrics and high GDP per capita, balanced by high dependence on hydrocarbons and a relatively underdeveloped economic policy framework. Sovereign net foreign assets are estimated to be the third-largest among Fitch-rated sovereigns, at over 190% of GDP in 2018, and government debt is the second-lowest, at around 7% of GDP. Oil and gas contribute around 80% of fiscal revenue, making it highly volatile. UAE governance scores remain below the 'AA' median, although they are the best in the Gulf Cooperation Council (GCC).
Higher oil prices are leading to a rapid rebound of revenue and continued increases in government spending. We expect a fiscal surplus of 2.7% of GDP in 2018, from a deficit of 3.5% of GDP in 2017. Higher oil prices will drive a 30% increase in revenue, while spending will rise by about 8%, after nearly identical increases in revenue and spending in 2017. Our fiscal numbers include the estimated investment income of Abu Dhabi Investment Authority (ADIA) in government revenue but treat any transfers from ADIA as financing items.
We expect the budget will slip back into a deficit of 3.3% of GDP by 2020, as Brent oil prices fall back to our long-term baseline assumption of an average of USD57.5/bbl and moderate spending growth continues, partly reflecting the three-year AED50 billion (5% of GDP) stimulus package announced by the Crown Prince in June. The full composition of the AED50 billion is unclear, but AED10 billion will be in the form of loan guarantees for SMEs, and AED20 billion will be spent in 2019.
The increased expenditure, which constitutes a loosening of underlying fiscal policy, follows significant structural fiscal reforms and spending cuts undertaken in 2015 and 2016 and the resulting slowdown of growth. Government spending was cut by a cumulative 25% between 2014 and 2016. Utility prices were raised for non-nationals, and various new fees and levies were introduced, including taxes on hotel stays, a tax on expat rental contracts introduced in 2017 and increased this year, and a proposed road tax. The UAE reformed petrol subsidies in 2015, putting in place a robust benchmark-linked pricing system that has continued to operate. The UAE government introduced 5% VAT in 2018, after introducing excise tax in October 2017.
We estimate that Abu Dhabi's fiscal financing requirement (or cumulative deficit excluding estimated ADIA income) will total USD32 billion for 2018-2020. We estimate that ADIA interest and dividend income may be enough to offset this, and we do not assume any further bond issuance after the USD10 billion in October 2017. Local-currency issuance at the Abu Dhabi level remains a remote prospect. Strong financial market returns may have allowed ADIA to mostly preserve the value of its assets in recent years, even as they have been used to finance the deficit. We estimate ADIA foreign assets at USD523 billion (nearly 200% of GDP) in 2018.
We expect real GDP growth of 2.0% in 2018, from a decline of 0.5% in 2017 led by oil production cuts. We forecast only a moderate pick-up of Abu Dhabi's non-oil growth to 2.5% in 2018 and 3.5% in 2019-2020, from 1.8% in 2017. The renewed expansion of the budget will support economic activity and confidence, but government spending growth did not prevent the economic slowdown in 2017. Short-term economic indicators have remained muted, and residential real estate prices have been falling. On the oil side, we only assume an production increase of 100k bbl/day in 2H2018, and the planned expansion of oil production capacity to 3.5m bbl/day represents an upside risk to headline growth and government finances.
Long-term growth potential is supported by continued public sector investments in the stock of capital, although a return to looser fiscal policy might delay the economy's transition away from a growth model that is reliant on government projects and immigration. The government is also undertaking structural reforms, which over time could help build momentum in the non-oil economy. The UAE has continued to pull ahead of its GCC peers on indicators of Doing Business, climbing to 11th place in the World Bank's 2019 ranking.
Contingent liabilities are high compared with peers but manageable in the context of Abu Dhabi's fiscal resources. We estimate state-owned and government-related-entity debt including banks and the Abu Dhabi National Oil Company at around 38% of GDP. The IMF estimates Dubai public sector debt at around 60% of Abu Dhabi GDP. UAE banking system assets are around 280% of Abu Dhabi GDP (Fitch's average Viability Rating for UAE banks is 'bbb'). However, we note that while Abu Dhabi is committed to the financial stability and health of the UAE, it was demonstrated in 2009-10 that support for Dubai and the UAE banking system is selective and narrowly delineated.
In our view, geopolitical risks are elevated relative to 'AA' peers. Tensions between Iran and Saudi Arabia and the US pose a risk to the region, in particular Dubai as a trade and financial hub. The UAE, led by Abu Dhabi, remains embroiled in the Yemen civil war and is taking part in the ongoing boycott of Qatar.
DATA LIMITATIONS
No official data is available on the international investment position of either Abu Dhabi or the UAE as a whole. In particular, there is no disclosure on the size of Abu Dhabi external assets (mostly relating to ADIA). There is limited disclosure on the assets' composition and returns, and Fitch is provided with some guidance on inflows and outflows. Fitch's estimates of Abu Dhabi's external assets are derived by compounding estimated government cash surpluses using assumptions about returns and asset allocations. Reported external debt numbers for Abu Dhabi relate to the government and government-related entities only. Balance of payments data for Abu Dhabi are also unavailable and are estimated using UAE data, Abu Dhabi trade data, and assumptions about ADIA investment returns.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Abu Dhabi a score equivalent to a rating of 'AA' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factor that could lead to positive rating action is:
-Improvement in structural factors such as a reduction in oil dependence, and a strengthening in governance, the business environment and the economic policy framework.
The main factors that could lead to negative rating action are:
-Erosion of fiscal and external positions, for example due to a sustained period of low oil prices, or a materialisation of contingent liabilities.
- Spill-over from a regional shock that impacts economic, social or political stability.
KEY ASSUMPTIONS
Fitch forecasts Brent crude to average USD 70/bbl in 2018, USD65/bbl in 2019 and USD57.5/bbl in 2020.
Fitch assumes no change to the peg of the UAE dirham to the US dollar.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at 'AA'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'AA'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Short-Term Local-Currency IDR affirmed at 'F1+'
Country Ceiling affirmed at 'AA+'. This applies to Abu Dhabi and Ras Al Khaimah.
Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'AA'
Contact:
Primary Analyst
Krisjanis Krustins
Director
+852 2263 9831
Fitch (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central
Hong Kong
Secondary Analyst (Abu Dhabi)
Jan Friederich
Senior Director
+852 2263 9910
Secondary Analyst (Ras Al Khaimah)
Eugene Chiam
Director
+44 20 3530 1512
Committee Chairperson
Ed Parker
Managing Director
+44 20 3530 1176
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.
Additional information is available on
Applicable Criteria
Country Ceilings Criteria (pub. 19 Jul 2018)
Sovereign Rating Criteria (pub. 19 Jul 2018)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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