Fitch Ratings has affirmed the UAE’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook even as overall GDP growth will slow to 3.1% in 2024 and pick up to 4.9% in 2025 after 3.6% in 2023. 

 

Fitch expects non-oil growth of 4.3% and hydrocarbon GDP to contract by 0.4% in 2024 as average oil production in 2024 will contract despite the loosening of Opec+ quotas in 2H24.

 

The 'AA-' rating reflects the UAE's moderate consolidated public debt level, strong net external asset position and high GDP per capita. This benefits from Abu Dhabi's sovereign net foreign assets (122% of UAE GDP in 2023), which are among the highest of Fitch-rated sovereigns. 

 

Weak governance indicators

These strengths are balanced by weak governance indicators relative to rating peers, the UAE's high dependence on hydrocarbon income and the significant leverage of 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 non-oil growth to slow to 3.4% in 2025 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 by 9.5% in 2025 due to higher Opec+ production caps.

 

Budget surpluses

Fitch projects the consolidated budget to remain in surplus in 2024 at 4.1% of GDP after 7.8% in 2023, with surpluses in Abu Dhabi (AA/Stable) and Dubai and budget deficits in Ras Al Khaimah (A+/Stable) and Sharjah (not rated).

 

Fitch projects the UAE fiscal breakeven oil price will average $64/bbl in 2024-26, although Abu Dhabi GRE dividend plans could be larger than forecast and reduce this. The consolidated surplus will amount to 3.3% of GDP in 2025 and 2.6% in 2026. Narrower deficits in Sharjah and higher production levels in Abu Dhabi will mitigate the gradual drop in oil prices from $80 per barrel in 2024 to $70/bbl in 2025 and $65/bbl in 2026. Fitch expects fiscal policy to remain pro-cyclical, driven by Abu Dhabi, but less so than pre-pandemic and with a greater share of the impulse delivered by state-owned enterprises (SOE).

 

Small federal government

The FG's budget is small, with revenues and expenditure at about 4% 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, given 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 2026, 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 e&.

 

Moderate consolidated government debt level

Fitch forecasts consolidated UAE government debt at 24% of GDP at end-2024, well below the 'AA' category median of 49%. It will be broadly stable in 2025 and 2026. Individual emirates have varied debt profiles, with Sharjah standing out with a higher debt burden. 

 

Dubai repaid AED29 billion (1.5% of UAE GDP) in market and private debt in 2023 and Emirates NBD Bank PJSC's loans to its parent, the Dubai government, fell as well. In an oil price shock scenario, Fitch expects Abu Dhabi would initially choose to increase borrowing over large draw-downs from Abu Dhabi Investment Authority, although the emirate has internal caps on borrowing.

 

Federal debt issuances continue

The FG's international market debt stands at $8.5 billion. 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 infrastructure projects, but Fitch expects the authorities not to use this option in case of new issuances.

 

Local currency issuance

The FG started issuing local-currency debt in 2022 and aims to bring the outstanding amount to about AED45 billion over the years, with the objective of building a domestic-currency yield curve rather than funding deficits or projects. 

 

The proceeds are invested in highly-rated international government bonds, mostly US Treasuries, with matching maturities. The authorities switched from issuing T-bonds to T-Sukuk during 2023.

 

High leverage

Despite a moderate government debt/GDP ratio, Fitch views the UAE as characterised by high leverage in its economy. Fitch estimates overall contingent liabilities from GREs of the emirates and the FG at about 62% of UAE 2023 GDP and gross non-bank private external debt stands at 46% of GDP. 

 

Based on publicly available data, a large share of SOE debt is at healthy SOEs with little risk but many do not disclose financial data. The public banking sector's debt was 24% of GDP in 2023. The sector is large with assets of about 200% of GDP in 2023, but risk is limited by the sector's increased net interest margin and strong liquidity.

 

Close links with Abu Dhabi

Fitch judges that close political and budgetary links, along with the strong influence of Abu Dhabi 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.

 

Security risks remain

Geopolitical remains elevated. Tensions between Iran and Israel and the US are still 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.

 

ESG - Governance: 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 70th percentile, reflecting its record of domestic political stability, strong institutional capacity, effective rule of law and a low level of corruption.

 

Rating sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

 

*Public Finances: A deterioration in Abu Dhabi's sovereign credit profile.

*Public Finances and External Finances: 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.

*Structural Features: A geopolitical shock that negatively affects economic, social or political stability.

 

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

*Public Finances: Increased confidence that Abu Dhabi would provide unconditional support in the event of need, for example, due to a guarantee for the timely service of the FG debt.

*Structural Features and Macroeconomic Policies: Improvement in structural factors such as a reduction in oil dependence, a strengthening in governance and the economic policy framework, and a reduction in geopolitical risk while maintaining strong fiscal and external balance sheets.

 

Sovereign rating model (SRM) and Qualitative overlay (QO)

Fitch's proprietary SRM assigns the United Arab Emirates 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.

 

Country ceiling

The Country Ceiling for the UAE is 'AA+', two notches above the UAE's Long-Term Foreign-Currency IDR. This reflects strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

 

Fitch's Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. Fitch's rating committee applied a further+1 notch qualitative adjustment to this, under the Near-term Macro-Financial Stability Risks and Exchange Rate Risks pillar reflecting that the Country Ceiling Model dips to +1 due to dollarisation of deposits passing 30%. The figure has been historically fairly volatile. It may be related to rising US dollar-denominated hydrocarbon export proceeds or the influx of new residents. External buffers are large and the creation of a UAE dirham yield curve may reduce dollarisation in future. These factors support keeping the Country Ceiling two notches above the IDR.--TradeArabia News Service