|16 February, 2020

S&P downgrades Sharjah to 'BBB', with stable outlook

The ratings agency cited increasing debt and interest burdens

Image used for illustrative purpose. Sharjah downtown, with the Central Souq in the foreground and downton's skyscrapers in the background, shoot in the afternoon.

Image used for illustrative purpose. Sharjah downtown, with the Central Souq in the foreground and downton's skyscrapers in the background, shoot in the afternoon.

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S&P Global Ratings lowered Sharjah’s rating, citing increasing debt and interest burdens.

The ratings agency lowered the emirate’s long-term foreign and local currency sovereign credit ratings to “BBB” from “BBB+” and kept the outlook stable.

Weak economic conditions in Sharjah since 2019 have led to lower revenues from government-related entities and land sales. These, combined with increased government grants and land compensation payments, as well as accelerated payments to contractors, have resulted in a wider-than-anticipated deficit, the ratings agency noted.

“Accelerated contractor payments related to infrastructure projects in the Emirate, as well as increased land compensation payments and grants to universities have resulted in higher-than-expected expenditure,” it said.

The ratings agency expects the emirate’s debt will increase further in 2020, leading to a general government deficit of 5.7 percent of GDP, as revenue from government related entities (GREs) and land sales both remain below the level seen in 2017-2018.

“We forecast Sharjah's fiscal deficits will average about 3.9% of GDP over 2020-2023,” S&P said while net general government debt is expected to increase to about 38 percent of GDP by 2023.

S&P anticipates 2019 real growth at about 1.8 percent of GDP, up from the 0.7 percent real growth in 2018 but below historical average.

S&P also expects the government to fully expend its budgeted contractor payments for the year and possibly make a capital injection of 785 million dirhams ($213.72 million) for the second part of the Invest Bank acquisition this year, adding to the debt burden.

In April 2019, Sharjah’s government acquired a 50.07 percent stake in the struggling Invest Bank for 1.12 billion dirhams.

“In our view, there is a rising risk of contingent liabilities from Sharjah's GREs, with GRE debt estimated at about 13 percent of GDP in 2019. We expect total net public sector debt (general government plus GRE debt) will increase to about 54 percent of GDP by 2023. We expect debt at Sharjah's largest GRE, Sharjah Electricity and Water Authority [SEWA], will increase as it continues its modernization program,” S&P said.

S&P noted a few factors supporting the rating such as the emirate’s relatively diverse economy compared with the rest of the sovereigns in the region as well as the benefits of being part of the UAE, including low external financing risks and the potential for extraordinary financial support from the UAE.

(Reporting by Gerard Aoun; editing by Seban Scaria)

( Gerard.Aoun@refinitiv.om )

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© ZAWYA 2020

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