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Abu Dhabi Can Withstand Oil Below $30

“We estimate that Abu Dhabi’s fiscal break even is around $30 per barrel, considerably below today’s oil price,” said Tristan Cooper, a Moody’s Vice-President/Senior Analyst and author of the report.

“Even if oil prices were to fall below $30 per barrel, the Abu Dhabi government could afford to run sizeable fiscal deficits for many years given its large stock of financial assets,” Cooper said in his credit report. Even under a plausible worst-case scenario, the potential liabilities of the Abu Dhabi government could be amply covered by its assets, he added.

Although financing has become more difficult given a shortage of liquidity among local and international banks, Abu Dhabi is better placed than other emirates and most other countries to ride out the global economic downturn given the strength of its government finances, he said, noting that overall confidence has been hit by the steep fall in the local equity market and a reported softening of real estate prices.

Abu Dhabi’s assets are mostly managed by the Abu Dhabi Investment Authority and are held offshore in a range of instruments including blue chip equities, bonds, and real estate.

While the full scale of these assets has not been revealed to Moody’s, they are known to be worth more than twice the value of the emirate’s projected 2008 GDP (more than $280 billion). This is after accounting for recent sharp declines in global equity markets.

According to Cooper, Abu Dhabi’s fiscal surplus and copious offshore financial assets are the main pillars supporting the emirate’s high sovereign ratings.

“The long-term foreign and local currency issuer ratings of the government of Abu Dhabi are Aa2 while the short-term foreign and local currency issuer ratings are Prime-1. The outlook on these ratings is stable.”

Although the government of Abu Dhabi currently has very little direct or guaranteed debt, its domestic contingent liabilities are extensive, he said.

“Given its economic dominance and leadership role within the UAE, Moody’s believes that there is a high likelihood that, although not legally obligated, Abu Dhabi would provide financial support either directly or indirectly to other emirate governments and systemically important banks and government-owned companies in the UAE if they were faced with 
difficulties that threatened the reputation or economic health of the country,” Cooper said.

However, it is unlikely that these contingent liabilities, which have a range of maturities, would all crystallise onto the balance sheet of the Abu Dhabi government.

“Most government owned companies and banks in the country are profitable, well-managed and have significant net assets,” Cooper said in his report.

· issacjohn@khaleejtimes.com