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UAE's sovereign rating improves as economic growth strengthens

ABU DHABI — Capital Intelligence (CI) credit rating agency, has raised the long-term foreign and local currency sovereign ratings of the United Arab Emirates (UAE) to AA- from A+.

The agency has also raised UAE's short-term foreign and local currency ratings to A1+ from A1. The outlook is stable.

The upgrade reflects CI's expectation that the fiscal and external current account positions will remain in surplus for the foreseeable future, contributing to the further strengthening of government and external balance sheets and increasing the authorities' already ample latitude to respond to oil price and other economic shocks.

The ratings take into account the vast hydrocarbon reserves and financial assets of Abu Dhabi and CI's expectation that the emirate would be willing to support federal institutions in the unlikely event of financial distress. The UAE economy has registered impressive growth for more than a decade, supported by substantial oil wealth and underpinned by sound financial policies, structural reforms, and government-led investments in internationally tradable sectors. The authorities intend to take further steps in the coming years to improve the economy's dynamism and resilience to external shocks (including oil price volatility).

Large-scale capital projects in a range of strategic industries are to be complemented by further investment in physical and social nfrastructure. Policy and institutional frameworks are to be strengthened and coordination between the federal government and individual emirates improved. CI notes that the economic development strategies of some of the emirates are ambitious and not without risks; but on balance the outlook for the real economy is favourable while weaker than envisaged economic growth would probably not have a significant impact on sovereign creditworthiness.

Substantial external liquidity and comfortable government finances provide key support to UAE's Sovereign ratings.

The current account surplus reached an estimated 21 per cent of GDP in 2006 and is expected to remain at relatively high, albeit declining, levels over the medium term. The country is a large net external creditor, with the external financial assets of the public sector and banking sector estimated by CI to have exceeded gross external debt by an amount equivalent to 164 per cent of GDP at end-2006.

Gross external debt is moderate at an estimated 54 per cent of GDP or 77 per cent of current account receipts (excluding re-exports). There is no reported external debt in the government sector while the foreign debt of government-owned entities appears to be moderate and mainly associated with self-financing, export-oriented projects. Official foreign exchange reserves of about $28 billion (17 per cent of GDP) are sufficient for exchange rate purposes and provide an adequate last line of defence against external shocks.

In the event of a large shock, CI would expect the emirate of Abu Dhabi to support the central bank by drawing down part of its large stock of external financial assets, which probably exceeds $260 billion, 161 per cent of GDP, though no official data is available.

The consolidated budgets of the federal government and emirate governments have recorded comfortable surpluses in recent years, reflecting the prudent management of rising oil revenues. Although oil is the primary source of fiscal revenue, CI estimates that the consolidated budget, excluding investment income and the net income of government enterprises, would be balanced at an oil price of around $35p/b.

The federal government operates a balanced budget policy while the largest emirate governments, Abu Dhabi and Dubai, tend to finance their fiscal activities through non-debt means. As a result, the combined debt of the federal and emirate governments is low, at an estimated 8.7 per cent of GDP at end-2006, and is only likely to increase over the medium term if the emirate governments borrow to support economic diversification projects. Government debt is comfortably exceeded by government deposits in the banking system and probably dwarfed by government external financial assets.