Published on 18 Sep 2019.
RAM Ratings has reaffirmed the United Arab Emirates’ (UAE) respective global and ASEAN-scale ratings of gAA2(pi) and seaAAA(pi) in view of its sizeable sovereign reserves, growth outlook and track record of implementing meaningful structural reforms. However, highly indebted or loss-making government-related entities (GREs) and unresolved weakness in the property market are concerns in regard to the country’s fiscal and macroeconomic profile. Similarly, the ratings are constrained by the UAE’s inherent dependence on oil and gas (O&G) activity, the prices of which are volatile given the industry’s sensitivity to global events.
Aggregate assets held by the UAE’s four largest sovereign wealth funds (SWFs) are sizeable – equating to over USD1.1 tril (or 260% of GDP in 2018) – and anchor the country’s ratings. These reserves afford significant policy space to buffer adverse shocks, ensure the availability of domestic liquidity which is essential given the UAE’s status as an international financial centre, and solidify its position as a regional safe haven. Against the backdrop of current volatile global conditions, the availability of vast reserves has gained increasing significance as a rating driver, allowing the UAE to distinguish itself from most other sovereigns in RAM’s portfolio.
Economic activity is expected to continue its recovery this year after expanding 1.7% in 2018 (2017: 0.5%), as the Government adopts a supportive fiscal stance and steps up hydrocarbon production. Fiscal support in 2019 comes in the form of an increase in public sector-driven construction activity as Expo 2020-related projects are accelerated, as well as the rollout of a sizeable stimulus package (AED50 billion or 3.3% of GDP in 2018, to be spent over three years) which would support SME activity, address structural bottlenecks and attract high value-added investments. The O&G sector – which accounted for 30% of GDP in 2018 – is expected to pick up due to a higher output ceiling agreed by the Organisation of Petroleum Exporting Countries (OPEC) at end-2018 following the imposition of US sanctions against Iran.
The UAE’s longer-term growth prospects are underpinned by its ability to enact meaningful reforms – evident in its diversified economic structure vis-à-vis regional neighbours. The recent implementation of various legislation, a reduction in business-related fees and changes in foreign home ownership regulations are anticipated to improve the country’s already-commendable business conditions. The successful rollout of the Value Added Tax system, which had generated 1.8% of GDP in fiscal revenues in 2018, further underscores the Government’s tentative steps towards diversifying income sources away from the hydrocarbon sector and is viewed favourably.
The UAE’s ratings are constrained by economic risks associated with the continued decline in residential property prices. Housing sector weakness is expected to persist owing to sluggish global demand conditions and still-robust incoming housing supply. GRE debt at USD92.8 bil (24.6% of GDP) in 2017 represents an ongoing fiscal contingent risk, given the exposure of the entities to the property sector and their strategic roles in achieving the Government’s policy objectives. That said, these debts have trended downwards in view of increasing efforts to contain contingent risks.
The ratings would be upgraded in the event of a sizeable reduction in GRE debt and continued improvement in non-oil fiscal revenues and economic diversification. Conversely, a downgrade would be warranted should hydrocarbon prices decline to such an extent as to significantly erode sovereign reserves or if an adverse property market shock exerts considerable growth and fiscal pressures.
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Ratings on United Arab Emirates