UAE gets first rating from Fitch ahead of federal bond sale

The United Arab Emirates was assigned the fourth-highest investment grade at Fitch Ratings as the Gulf nation prepares to issue a federal bond for the first time.

The company ranked the sovereign AA- with a stable outlook. It cited moderate consolidated public debt levels, a solid external asset position, and the likelihood of support from the nation’s capital Abu Dhabi if needed. Moody’s Investors Service rates the UAE at Aa2, its third-highest investment grade.

“The UAE’s fiscal and external balance sheets benefit from Abu Dhabi’s large sovereign net foreign assets,” the agency said on Wednesday. “However, although Abu Dhabi is committed to the financial stability and health of the UAE, it demonstrated in 2009-10 that support is selective.”

Abu Dhabi is rated one level above the UAE at Fitch, which now sees the federation’s budget shortfall widening to 3.8 per cent of gross domestic product in 2020 from a surplus of 3.8 per cent in 2019.

“This whole exercise is driven much less by some urgent financing need and need to finance a deficit,” Jan Friederich, a Hong Kong-based senior director for sovereign ratings at Fitch, said in an interview on Bloomberg TV on Thursday. “Instead, it is much more about developing a yield curve that allows government-related entities and the private sector to issue easily in domestic markets.”

The UAE has never raised a federal bond, as issuances often happen at an emirate level, and Fitch’s Friederich said he did not have an indication of when the country might tap the market.

Both Dubai and Abu Dhabi have sold bonds this year as countries in the region grapple with budget deficits amid a collapse in oil prices. Neighbouring Saudi Arabia raised more than $21bn while Qatar opted for a $10bn issuance, according to Bloomberg data.

Debt in the UAE is predicted to rise over the next two years, mostly in Abu Dhabi and to a lower extent in Dubai, partly because of the capital’s preference for debt over asset drawdowns.