Moody’s upgrades Abu Dhabi rating from negative to stable

Ratings agency Moody’s Investors Service has upgraded its outlook on the Abu Dhabi government from negative to stable, it announced on Thursday.

Concurrently the long and short-term issuer ratings have been affirmed at Aa2/P-1.

In a report, the agency attributed the outlook change to –

* An effective and broad policy response to the lower oil price environment via an acceleration in the reform agenda

* The economy’s growth prospects supported by a healthy banking system

* An easing of contingent liability risk

“Authorities have enacted broad subsidy reforms and expenditure cuts. Fuel, electricity and water prices were increased more rapidly and effectively than in other GCC countries. Together with these reforms, reductions in capital expenditures and transfers allowed Abu Dhabi’s government spending to shrink by 23 per cent over two years,” Moody’s said.

The agency also acknowledged progress made by the emirate in diversifying revenue.

“Moody’s believes that the UAE is better prepared than its GCC neighbors to implement a new value-added tax in 2018. In addition, a new municipal fee on rental contracts of the expatriate population has been levied, and the authorities are reportedly considering the introduction of a corporate income tax.”

As a result of the reform programme and stabilising oil prices, Moody’s expects Abu Dhabi’s fiscal deficit to come down to 2 per cent of GDP in 2017 and 0.3 per cent of GDP in 2018.

The emirate government’s debt burden is also likely to stabilise at very low levels, below 8 per cent of GDP by 2018, assuming no contingent liability risk materialises, the report said.

“The rating agency considers that the emirate’s fiscal buffers have not been materially impacted by the recent deficits and, with sovereign-wealth fund assets estimated at more than
200 per cent of GDP, those buffers continue to provide ample shock absorption capacity,” it added.

Moody’s expects Abu Dhabi’s non-oil real GDP growth to slow to 1.9 per cent in 2017, from 8.6 per cent in 2014, in line with lower government spending, a decline in real estate investment, and a drop in goods exports that was partially offset by higher re-exports and tourism activity.

“While sentiment has improved with firmer oil prices, one reason for weaker 2017 growth is our expectation that crude oil output will decline slightly due to production cuts decided during the recent OPEC agreement,” it said.

However, Moody’s estimates that real GDP growth will pick up from 1.5 per cent in 2017 to 2.2 per cent in 2018, supported by a rebound in hydrocarbon activity, improvements in the government’s fiscal position that will support an acceleration in government spending, and improved liquidity in the domestic banking system.

“Abu Dhabi’s fiscal reserves will remain well above 200 per cent of GDP over the next few years, under our oil price corridor assumption of between $40 to $60 per barrel through 2018. The diversification of Abu Dhabi’s offshore investments offers resilience to low oil prices and a growing source of non-oil revenue,” Moody’s said.

However, the emirate’s “susceptibility to event risk continues to constrain the rating and is primarily driven by geopolitical factors affecting the region”, the report added.

The following factors and developments would be credit positive: (1) further progress in economic and fiscal diversification; (2) improvements in the predictability and transparency of fiscal policies at the emirate and UAE level; and (3) a material appeasement in regional geopolitical tensions.

Meanwhile the following factors and developments would be credit negative: (1) a prolonged period of oil prices well below our expectations; (2) the crystallisation of large contingent liabilities; (3) a material reduction in government financial assets; and, (4) a deterioration in the domestic or regional political environment that threatened to disrupt international trade.