Dubai: Fitch Ratings has affirmed the UAE Federal Government’s Long-Term Foreign Currency Issuer Default Rating at 'AA' - with a stable outlook, making it among the highest ratings in the region.
His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, took to the Twitter to proudly announce the achievement.
“According to Fitch Ratings, the UAE Federal government has achieved rating at 'AA'- with a stable outlook, becoming among the highest in the region. Our rational fiscal and monetary policies are key to the financial stability in the country. My thanks to all work teams in the Federal government for this achievement,” Sheikh Mohammed tweeted.
“The credit rating reflects the UAE's moderate consolidated public debt level, strong net external asset position and high GDP per capita. It also reflects the likelihood of support from Abu Dhabi in the event of need,” the rating agency said in a report.
Fitch evaluates the creditworthiness of the UAE federal government based on the consolidated fiscal and external position of all the Emirates.
The UAE federal government is currently required by law to balance its budget and has a track record of doing so. It has no debt of its own but plans to start issuing debt soon, mainly for the purpose of building a yield curve and developing domestic financial markets.
The federal government is nominally liable for a very small amount of debt, 0.7 per cent of 2020 GDP, on-lent from the central bank to a government related entity (GRE) of an Emirate during the global financial crisis (GFC), but the debt is serviced directly by the GRE.
Budget deficit
The COVID-19 pandemic and the oil price shock it triggered means Fitch forecasts a consolidated budget deficit of 3.8 per cent of GDP in 2020 from a surplus of 3.8 per cent in 2019. Financing needs (fiscal balance excluding estimated Abu Dhabi Investment Authority (ADIA) investment income) will reach 6.3 per cent of GDP in 2020, before progressively narrowing to 2.2 per cent by 2022, from a surplus of 1.3 per cent in 2019.
“Our fiscal numbers include in revenue estimated investment income of ADIA, which has estimated foreign assets of $579 billion (164 per cent of GDP) at end-2019, but treat the estimated cash transfers from ADIA (which the government includes in dividend revenue) as financing items,” Fitch said in a note.
Reasonable debts
The rating agency forecast consolidated UAE government debt at 34 per cent of GDP in 2020, below the 'AA' category median of 39 per cent. It will rise to about 45 per cent of GDP by 2022, driven the Emirates' deficits and the federal government debt issuances.
Individual Emirates present varied debt profiles, with the Emirate of Dubai standing out with debt at close to 80 per cent of Dubai's GDP in 2020 according to Fitch's forecast (based on data provided in Dubai's latest bond prospectus and adding the debt owed to Emirates NBD, in line with IMF practices).
“We expect debt to continue to rise over the next two years, mostly in Abu Dhafbi and to a lower degree Dubai, due to low oil prices, a subdued non-oil growth outlook and a preference for debt over asset drawdowns in Abu Dhabi,’ Fitch said.
Contingent liabilities
Fitch views the UAE as characterised by a high degree of leverage in its economy. “We estimate overall potential contingent liabilities from GREs at about 80 per cent of UAE 2020 GDP and gross non-bank external debt stands at over 62 per cent of GDP. UAE banking system assets are around 250 per cent of UAE 2020 forecast GDP.
“Fitch's weighted average viability rating for UAE banks is 'bbb'. Banks' Standalone Credit Profiles are likely to weaken in 2020 as a result of the coronavirus crisis and lower oil prices that exacerbated an already challenging operating environment,” the rating agency said.
Fitch estimates that the federal government has limited exposure to individual emirates' direct or contingent liabilities and these would be unlikely to migrate to the federal government's balance sheet. The UAE's financial framework has strengthened since the GFC when the federal government received loans from the central bank that were then on-lent to the banking sector. These loans have been repaid and the central bank law of 2018 now allows the central bank to directly lend to banks, which was not the case during the GFC. Other central bank loans transited through the federal government with only 0.7% of 2020 GDP remaining.
Net foreign assets
According to Fitch, the UAE's fiscal and external balance sheets benefit from Abu Dhabi's large sovereign net foreign assets. “The central bank's international reserves are forecast to stand at three months of current account outlays in 2020, in line with the 'AA' median, and we consider that Abu Dhabi's external assets would constitute a backstop if needed,” Fitch said.
Strong federal finances
The federal government's budget is small at about 5 per cent of GDP and its remit is centered around the provision of essential public services such as infrastructure, health, education and police. It is also nominally responsible for the military but most of those duties are delegated to Abu Dhabi.
Fitch forecasts overall GDP to contract by 6.8 per cent in 2020 with a 6.4 per cent reduction of non-oil GDP. Growth will remain modest in 2021, at 1.7 per cent due to constraints from OPEC commitments on oil production and a limited rebound of non-oil growth to 2.9 per cent in 2021. Continued rationalisation of public spending, consolidation of the financial sector and global travel restrictions will continue to weigh on growth, despite some potential uplift from Dubai Expo in 2021.
Adverse real estate market dynamics, compounded by the pandemic, will continue to drag on growth, following years of oversupply, which resulted in a prolonged drop in prices. Fitch expects GDP growth to reach 3.9 per cent in 2022, it will largely driven by higher levels of hydrocarbon production.
