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Stable outlook for Abu Dhabi

Isaac John (associate Business Editor)
Filed on February 11, 2015

Strong buffers seen to prop up emirate’s economy despite lower oil prices

Stable outlook for Abu Dhabi

Dubai — Abu Dhabi’s fiscal and external buffers are sufficiently strong for the emirate to withstand the lower oil-price trajectory at the current  level, the ratings agency Standard & Poor’s said on Tuesday.

Affirming “AA/A-1+” sovereign credit ratings on Abu Dhabi, S&P said the stable outlook reflects its view of balanced risks to the ratings over the next two years.

“We believe that Abu Dhabi’s economy will remain resilient and its fiscal policy will remain prudent and flexible,, but we also anticipate structural and institutional weaknesses to remain,” it said.

The New York-based agency said it could consider raising Abu Dhabi’s ratings if it observed pronounced improvements in data transparency, including on fiscal assets and external data, alongside further progress in institutional reforms. Measures to improve the effectiveness of monetary policy, such as developing domestic capital markets, could be positive for the ratings over time, it said.

S&P, however, lowered the outlook for the world’s top oil exporter Saudi Arabia’s “AA-/A-1+” foreign and local currency credit ratings to negative from stable, warning the oil-dependent kingdom’s finances could be damaged by the price drop. It also downgraded Oman and Bahrain on sliding oil prices while affirming Qatar’s double-A ratings, two notches below the coveted triple-A rating.

S&P’s actions were the biggest move by a rating agency in the Gulf since the price of Brent crude plunged below $60 a barrel in December, from $115 last June.

S&P cut its outlook for Saudi Arabia’s “AA-/A-1+” foreign and local currency credit ratings to negative from stable, warning the oil-dependent kingdom’s finances could be damaged by the price drop. Brent crude slipped 1.2 per cent to $57.65 per barrel on Monday as the International Energy Agency said the United States would remain the world’s top source of oil supply growth until 2020, defying expectations of a more dramatic slowdown in shale output growth.

“Given its high dependence on oil, Saudi Arabia’s currently very strong fiscal position could weaken owing to the oil price decline,” S&P said.

“The negative outlook reflects our view that Saudi Arabia’s general government fiscal position is weakening,” it said. S&P noted that Bahrain derived about 65 per cent of its fiscal revenue last year from crude oil receipts, which are part of the 84 per cent of total revenue it derives from the oil and gas industry. Wages and salaries account for 42 per cent of total government spending, with subsidies representing another 30 per cent. “These increasingly burdensome social expenditures underpin Bahrain’s pronounced vulnerability to oil prices,” it said, noting the government’s debt burden has doubled since 2009, to 43 per cent of gross domestic product at the end of 2014.

However, despite the bleak outlook for most GCC states, regional bond prices barely moved on Tuesday. The spread of state-controlled Saudi Electricity Co’s dollar sukuk maturing in April 2023, one of the most liquid international Saudi credits, against 10-year US Treasury bonds edged up just one basis point.

The spread of Bahrain’s dollar sovereign bond maturing in August 2023 against 10-year U.S. Treasuries rose 5 bps. Bank Muscat, Oman’s biggest bank, saw the spread of its 2018 dollar bond against five-year U.S. Treasuries widen two bps.


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