"Although not officially published, historical financial flows, sovereign wealth fund [SWF] assets and external debt data suggest that UAE's net IIP may be as high as 130 per cent of the country's gross domestic product [GDP], ranking the country in the top quartile globally," said Moody's.
Assets of the country's largest SWF, the Abu Dhabi Investment Authority, or Adia, which are estimated at approximately 160 per cent of GDP and invested primarily overseas, represent the main component of the country's net IIP, far exceeding the stock of external debt, which is expected to exceed 70 per cent in 2016.
"At their current levels, combined assets of Adia and the Central Bank are sufficient to cover the country's external debt and several decades of current account deficits," said Moody's.
The Institute of International Finance estimates the total assets of Adia at $606 billion, which is equivalent to 163 per cent of the Emirates' 2015 GDP or five years of general government expenditure as of end 2015, up from $412 billion at the end of 2009 and $134 billion at the end of 2000.
However, the Sovereign Wealth Fund Institute (SWFI) has a higher estimate of $773 billion. In addition, the SWFI lists the Abu Dhabi government-owned IPIC and Mubadala as sovereign wealth funds, each with assets of $66 billion.
"However, as these are government investment vehicles for the purpose of economic development and diversification, their assets are for the most part not liquid and we do not consider them to have the characteristics of sovereign wealth funds. None of these companies' assets are netted from our debt calculations, their debt is included in our calculation of non-financial public sector debt," the global ratings agency said in a research note.
Moody's also ranks the UAE slightly higher than Qatar and Kuwait for "economic strength". It argues that while the three countries have a very high per capita income, Qatar and the UAE share a high level of competitiveness and favourable growth prospects, but the UAE has a higher nominal GDP.
The report said the UAE's institutional framework is closer to Qatar's, with similar Worldwide Governance Indicator scores and inflation track record, but is weaker than non-regional peers. "The UAE shares the pristine finances of Qatar and Kuwait - stronger than Belgium and Saudi Arabia - and an element of geopolitical risk inherent to GCC countries."
Moody's report is also upbeat about deficits which are projected to begin to decline in 2017 in its baseline scenario, with deficits shrinking through 2019, when public investment for the Dubai Expo 2020 is likely to cause a temporary widening.
"These expectations are based on our oil price projections for Brent of $33 per barrel in 2016, $38 in 2017, and rising to $48 by 2019, as well as an increase in the volume of production. Oil production capacity is targeted to increase by 30 per cent by 2020 from approximately three mb/d in 2015. Although this target may not be fully achieved, an upward trend is nonetheless expected. Looking at alternative scenarios where oil prices average $10 higher or lower than our baseline projections, the trend is still for shrinking deficits, although in the lower-price scenario they would consistently remain above five per cent of GDP," Moody's said.
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