Fiscal buffers set to cushion Capital from oil, Covid impact

Dubai - Abu Dhabi's economic growth had been subdued, averaging 1.3 per cent over 2018-2019, largely as a result of oil production cuts under the previous Opec agreement.

Abu Dhabi's real GDP growth will gradually recover from 2021 on the back of higher oil prices and improving domestic demand, after the economy facing severe challenges in 2020 due to lower oil production and the pandemic-mandated lockdown, S&P Global Ratings said on Saturday.
"We expect regional geopolitical tensions will, on balance, have a limited impact on Abu Dhabi, and anticipate continued domestic stability. Abu Dhabi's key rating strength is its large fiscal buffers, exceeding 250 per cent of GDP," said the ratings agency.
S&P expects those fiscal buffers will be sufficient to offset the potential financial impact of increased regional political risks. "To act as a buffer against oil price volatility, the government has accumulated one of the largest net asset positions of all sovereigns we rate. These assets should cushion Abu Dhabi from the effect of oil price swings on economic growth, government revenue, and the external account, as well as increasing geopolitical uncertainty in the Gulf region."
The ratings agency noted that the government has proactively implemented fiscal reform measures since the fall in oil prices in 2015 that allowed an almost-balanced central government budget in 2018 and 2019.
"Abu Dhabi's fiscal position is underpinned by hydrocarbon revenue and affected by oil price movements, despite government's efforts to increase non-oil revenue. Contingent liabilities from government-related entities or other emirates, although not contractual, could materialize in a highly uncertain regional and global economic environment," Zahabia S Gupta, primary credit analyst at S&P said.
"The stable outlook reflects our expectation that Abu Dhabi's fiscal and external net asset positions will remain strong over the next two years, although structural economic and institutional weaknesses will likely persist. We could consider raising our ratings on Abu Dhabi if we observed pronounced improvements in data transparency, including on fiscal and external assets, alongside further progress in institutional reforms," said Gupta .
The ratings agency said measures to improve the effectiveness of monetary policy, such as developing domestic capital markets, could be positive for the ratings over time. "We could consider lowering the ratings if we expect a material deterioration of Abu Dhabi's currently strong fiscal balance sheet and net external asset position. If fiscal deficits or contingent liabilities caused liquid assets to drop below 100 per cent of GDP, pressure on the ratings would develop."
S&P estimated a contraction in real GDP of 7.5 per cent and of nominal GDP by 22 per cent in 2020, and a gradual recovery from 2021, with real GDP averaging 2.2 per cent over 2021-2023. Since 2019, the UAE and Abu Dhabi have introduced structural measures to improve the business environment and encourage foreign investment. To counteract the impact of the COVID-19 pandemic, the Central Bank of the UAE has announced a major package to support the banking and corporate sectors.
"While this should help ease the pressure on corporate issuers and small and midsize enterprises, we expect banks' credit losses will increase in 2020-2021, leading to a slump in banking sector profitability. We therefore now see the trends for economic and industry risk in the UAE banking sector as negative rather than stable," it said.
Even before the pandemic began, Abu Dhabi's economic growth had been subdued, averaging 1.3 per cent over 2018-2019, largely as a result of oil production cuts under the previous Opec agreement. At the same time, non-oil sector activity stalled because of weak regional demand, tight fiscal and monetary policy, and rising geopolitical tensions. "In our view, Abu Dhabi's wealth levels mitigate the effect of weak trend growth, which we project throughout the forecast horizon, on the sovereign's creditworthiness." - issacjohn@khaleejtimes.com