CI affirms UAE ratings; outlook stable

Dubai - The outlook for the rating is stable, meaning it is likely to remain unchanged over the next 12 months.

International credit ratings agency Capital Intelligence, or CI, has affirmed the UAE's long-term foreign and local currency sovereign ratings of AA- and its short-foreign and local currency sovereign ratings of A1+ after taking into account key economic and financial indicators.
The outlook for the rating is stable, meaning it is likely to remain unchanged over the next 12 months, provided that key metrics evolve as envisioned in CI's baseline scenario and no other credit quality concerns arise. 
The ratings reflect the overall strength of the UAE's public and external finances and the resultant capacity to absorb economic shocks; moderate levels of public debt; and generally favourable macroeconomic performance, CI said in a statement.
CI said its ratings also take into account the vast hydrocarbon reserves and financial assets of the government of Abu Dhabi, and the expectation that the emirate would be willing to support federal institutions in the unlikely event of financial distress.
"Economic growth is expected to remain steady in the medium term, averaging 3.2 per cent in 2015-17, with growth in the services and trade sectors partially offsetting the impact of the prolonged period of low oil prices on the overall economy," CI said.
It noted that the consolidated budget surplus of the UAE declined in 2014 to 2.2 per cent (9.9 per cent in 2013) due to the decrease in international oil prices.
"Assuming an average oil price of $60 per barrel, the fiscal position is expected to weaken in 2015-16, with the budget posting a deficit of 8.6 per cent and 7.5 per cent in 2015 and 2016, respectively."
It noted that consolidated government debt, of which only a small proportion relates to the federal government, is expected to edge up to 14.7 per cent of GDP in 2015, from 12.1 per cent of GDP in 2014. Public debt is higher at around 58 per cent of GDP, and primarily reflects the borrowings of commercially-oriented government-related entities, or GREs - most of which are not formally guaranteed by Emirati governments. However, most GREs are currently able to rollover or repay maturing debt obligations, the ratings agency said.
"The country's external finances are expected to remain healthy in the short to intermediate term. The current account surplus is expected to narrow to 5.3 per cent of GDP in 2015, from 12.1 per cent of GDP in 2014, with robust growth in the non-oil sectors partly offsetting the impact of lower oil prices. Official foreign exchange reserves of about $74.8 billion (18 per cent of GDP in 2014) provide solid backing for the currency peg and an adequate buffer against external liquidity shocks, and are expected to remain at comfortable levels in the intermediate term," CI said.
The country's gross external debt remains manageable at an estimated 52 per cent of GDP in 2015. About 92 per cent of the debt stock represents the foreign liabilities of the private sector, especially the UAE's large banking sector, and is comfortably exceeded by banks' foreign assets. The rest of the debt represents various conventional and Islamic debt instruments issued to complete the restructuring of GREs.
Oil and gas still accounts for about 82 per cent of consolidated government revenue, 32.5 per cent of total exports, and (directly) 31.5 per cent of GDP. Moreover, the government's budget structure is relatively weak in view of the overreliance on oil, the limited tax base and high expenditure rigidities.
CI said the UAE banking system is broadly sound with high levels of capitalisation. Although asset quality is improving, the share of non-performing loans in gross loans remains comparatively high, partly due to the problems of the real estate sector in the major emirates and the ongoing financial restructuring of loans owed by a few GREs. Liquidity ratios have improved in recent years and several banks have comfortably repaid the Tier 2 debt capital placed by the government in the early days of the financial crisis. Credit growth regained momentum in 2014, while the rules on credit concentrations introduced by the Central Bank of the UAE have helped to cap the exposure of banks to the real estate market, it said.
- issacjohn@khaleejtimes.com