S&P affirms Abu Dhabi’s AA/A-1+ ratings with stable outlook on strong financials

By bne IntelliNews November 8, 2013

Standard & Poor's affirmed on Nov 8 its AA/A-1+ long and short-term foreign and local currency sovereign credit ratings on Abu Dhabi with a stable outlook. Abu Dhabi's large external and fiscal net asset positions provide the emirate with a strong buffer to support its economy and mitigate the risks from external vulnerabilities, S&P said. The stable outlook balances Abu Dhabi's wealthy economy “and prudent and flexible policies” against the risks from structural and institutional weaknesses, high contingent liabilities, and limited monetary policy flexibility, S&P underscored.

But Abu Dhabi’s ratings are constrained by its less-developed political institutions and “bigger structural weaknesses than non-regional peers in the same ratings category.”

The contingent liabilities from Abu Dhabi-based government-related entities (GREs), limited monetary policy flexibility, given the currency peg and the underdeveloped domestic bond markets, also constrain the ratings, S&P said.

Abu Dhabi is one of the world's wealthiest economies with an estimated GDP per capita at USD 106,000 in 2013. S&P noted that Abu Dhabi’s economic growth have strengthened since 2010, supported by rising oil output, high public spending, and broadening of the economy’s production base including services and manufacturing. The emirate’s GDP growth will reach 5.2% in 2013 (down from 5.6% a year earlier) on 3.5% growth in the oil sector and 7.0% in the non-oil sectors, S&P forecasts.

Assuming an oil export price of USD 110 per barrel in 2013, Abu Dhabi’s fiscal surplus will reach 13.3% of GDP (including petroleum dividends and investment income), according to S&P. In 2014-2016--and assuming that oil prices remain around USD 110 per barrel-- the fiscal surplus will average 11% of GDP, helping to further boost  Abu Dhabi’s net asset position, S&P noted.

The ratings agency commented Abu Dhabi’s robust net asset position, estimated at 205% of GDP in 2013. The latter will provide the emirate with a comfortable buffer to meet contingent liabilities that may arise, particularly from government-related enterprises (GREs). At end-2012, the debt of Abu Dhabi's GREs was 41% of GDP, of which 19% of GDP represented the parent-level debt of Mubadala Development Company, International Petroleum Investment Company, Tourism Development and Investment Company, and Abu Dhabi National Energy Company, S&P said.

The local currency peg to the USD constrains Abu Dhabi’s monetary policy independence, S&P warned. The “underdeveloped capital markets” also weigh on the transmission of monetary decisions. But the government is considering the regular issuance of domestic debt from 2014 to strengthen domestic capital markets, S&P said.

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