S&P affirms Sharjah’s A/A-1 ratings on rising GDP per capita, outlook stable

By bne IntelliNews May 23, 2014

Standard & Poor's affirmed its A/A-1 long- and short-term foreign and local currency sovereign credit ratings on the Emirate of Sharjah. The outlook is stable. S&P underscored that Sharjah's GDP per capita will increase on the back of strong growth in the UAE. The stable outlook balances S&P’s view that “Sharjah's relatively high GDP per capita will benefit from the UAE's robust growth against the Sharjah government's rising interest burden.”  Sharjah's government interest expenditures, as a percentage of government revenues, will increase to about 12% in 2014-2017, S&P forecasts.

S&P also factors in the advantages of membership in the UAE, which include low external risks for Sharjah. Under certain circumstances, Sharjah will get extraordinary financial support from the UAE’s federal government if needed, the ratings agency noted.

Compared to other GCC states, the ratings on Sharjah are constrained by its underdeveloped political institutions and highly centralized policy-making, which can undermine policy predictability, according to S&P.

Sharjah is the third-largest member of the UAE in terms of population, GDP, and geographic area, S&P said. The emirate boasted 10% of the UAE's total population and accounted for about 5% of the UAE's GDP for 2013.

Policy-making is highly centralized and depends heavily on Sharjah's ruler, Sultan bin Mohammed Al Qasimi. Such a trend could undermine institutional effectiveness and policy predictability, according to S&P. The fundamentals of the real economy, however, are strong in Sharjah, underpinned by a relatively diverse production base. The four largest sectors are real estate and business services (about 20%); manufacturing (16%); mining, quarrying, and energy (13%); and wholesale and retail trade (12%), S&P said. Sharjah’s GDP per capita reached USD 25,000 in 2013, S&P estimated. Real per capita GDP growth, which is a weighted average for the period 2008-2017, will reach 4% this year, the ratings agency forecasts. This is relatively high compared with peers with similar wealth, it added.

The Sharjah government's budget is small, as the UAE federal budget covers a large share of public services. Sharjah government expenditures will account to 8% of GDP in 2014, S&P said. The government's revenue base is similarly small--at about 6% of GDP--but relatively diverse, according to S&P.

In 2013, the major contributors to Sharjah government’s revenues were: licenцes, fees, and fines (about 24% of total revenues); customs (18%); and land sales (16%). The Sharjah government wants to meet current spending from its recurrent revenue base, S&P noted.

Sharjah's general government deficit will likely widen to more than 2% of GDP in 2014, from 1.3% in 2013, as capital expenditures expand, S&P forecasts. The Sharjah government will record modest deficits of less than 2% of GDP during 2014-2017. 

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