Fitch Ratings has affirmed UAE’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA-' with a stable outlook, considering UAE’s moderate consolidated public debt level, strong net external asset position and high GDP per capita.

 

Fitch forecasts overall GDP growth to slow to 2.1% in 2023 and 3.6% in 2024 after close to 8% in 2022. 

 

“We expect non-oil growth of 3.4% and hydrocarbon GDP to contract by 1.4% in 2023 close to the Opec+ quota. We project non-oil growth to slow to 2.7% in 2024 but remain relatively robust despite global headwinds, supported by government and GRE spending, a robust real estate sector, dynamic past population growth and GCC demand. The hydrocarbon sector will expand in 2024 due to higher Opec+ production caps,” Fitch said.

 

Fitch forecasts consolidated UAE government debt at 31.4% of GDP in 2023, below the 'AA' category median of 45%. It will be broadly stable in 2024 and 2025. Individual Emirates have varied debt profiles, with Dubai standing out, with debt estimated at close to 78% of its GDP in 2022.

 

Abu Dhabi's sovereign net foreign assets

Meanwhile, UAE benefits from Abu Dhabi's sovereign net foreign assets, which are among the highest of Fitch-rated sovereigns. These strengths are balanced by weak governance indicators relative to rating peers, the UAE's high dependence on hydrocarbon income and the significant indebtedness of some of the Emirates and their government-related entities (GREs).

 

The 'AA-' rating applies to the federal government (FG) of the UAE. Fitch evaluates the creditworthiness of the UAE FG based on the consolidated fiscal and external position of all the Emirates as is standard practice for federal entities, as well as the FG's standalone fiscal position and institutional set up.

 

Fitch projects the consolidated budget to remain in surplus in 2023 at 4.6% of GDP after 11.1% in 2022, with a surplus in Abu Dhabi with an average Brent oil price of $80 per barrel, a balanced budget in Dubai and Ras Al Khaimah and a deficit in Sharjah.

 

“We project the UAE fiscal breakeven oil price will average $62/bbl in 2023-25, The consolidated surplus will amount to 3.7% of GDP in 2024 and 3.4% in 2025,” said Fitch. 

 

Narrower deficits

Narrower deficits in Sharjah and higher production levels in Abu Dhabi will mitigate the negative impact of a gradual drop in oil prices to $75/bbl in 2024 and $70/bbl in 2025. Fitch expects fiscal policy to remain pro-cyclical, driven by Abu Dhabi, but to a lower extent than pre-pandemic and with a greater share of the impulse being delivered by state-owned enterprises (SOE) such as ADQ (Abu Dhabi Developmental Holding Company PJSC, AA/Stable).

 

The FG's budget is small, with revenues and expenditure at about 3.5% of GDP and its remit is centred around the provision of essential public services such as infrastructure, health, education and police. 

 

The FG is required by law to balance its current budget and has a record of broadly balancing the overall budget. Although its revenues and outlays are relatively stable, the FG has limited fiscal flexibility in view of its small revenue base and limits on running deficits and issuing debt.

 

The FG is likely to receive a share of corporate income tax proceeds from 2024, but this is unlikely to materially change its fiscal profile, with a large share of revenue coming from grants from Abu Dhabi and dividends and royalties from federally-owned telecom SOEs, Du and Etisalat.

 

The FG issued $7 billion on international markets and has reached the cap set by the Cabinet, although the debt law would allow the FG to issue more. All the proceeds were placed with the Emirates Investment Authority for long-term investment. The debt law could allow proceeds from foreign-currency issuances to be partly used for investment, but Fitch expects the authorities not to use this option in case of new issuances.

 

Issuing debt

The FG started issuing debt in local currency in 2022 and aims to bring the outstanding amount to about AED45 billion ($12.25 billion) over the years, with the objective of building a domestic-currency yield curve rather than funding deficits or projects. All the proceeds are invested in highly-rated international government bonds, mostly US Treasuries, with matching maturities. GREs will likely be among the first other entities to issue local-currency bonds in the UAE. The authorities have switched from issuing T-bonds to T-Sukuk during 2023.

 

Despite a moderate government debt/GDP ratio, Fitch views the UAE as characterised by a high degree of leverage in its economy. It estimates overall contingent liabilities from GREs at about 64% of UAE 2022 GDP and gross non-bank private external debt stands at 50% of GDP. 

 

A large share of SOE debt is owed by healthy SOEs presenting little risk, but there is less visibility on Dubai Inc. The public banking sector's debt stood at 38% of GDP in 2022. The sector is large with assets of about 183% of GDP in 2022, but risk is limited by the sector's increased net interest margin and strong liquidity.

 

“We judge that the close political and budgetary links, along with the strong influence of Abu Dhabi (AA/Stable) over the FG budgeting and the essential nature of public services it provides place the FG higher in Abu Dhabi's support hierarchy than individual Emirates, should it be required.” However, Abu Dhabi does not provide an explicit guarantee that would ensure unconditional and timely support to the FG.

 

Geopolitical risks

"In our view, geopolitical risks are high relative to 'AA' rated peers. Tensions between Iran and Israel and the US still pose a risk to the region, in particular to Abu Dhabi's hydrocarbon infrastructure and to Dubai as a trade, tourism and financial hub. Although it has scaled back its military presence, the UAE remains involved in the Yemen civil war, which led to drone attacks in early 2022."

 

The UAE has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. 

 

The UAE has a high WBGI ranking at the 67th percentile, reflecting its record of domestic political stability, strong institutional capacity, effective rule of law and a low level of corruption.

 

Fitch said factors that could, individually or collectively, lead to negative rating action/downgrade include a deterioration in Abu Dhabi's sovereign credit profile; substantial erosion of the external position of the UAE and/or of individual Emirates' fiscal position, for example due to a sustained period of low oil prices or a materialisation of contingent liabilities; a geopolitical shock that negatively affects economic, social or political stability.-- TradeArabia News Service