Abu Dhabi Affirmed At 'AA/A-1+'; Outlook Stable

  • Abu Dhabi's net asset position exceeds 250% of GDP, which alongside proactive policymaking comfortably cushions it from the sharp fall in oil prices and other external shocks.
  • Contingent liabilities from government-related entities or other emirates, although not contractual, could materialize in a highly uncertain regional and global economic environment; yet we expect Abu Dhabi's fiscal buffers will remain strong.
  • Abu Dhabi's strong net asset position exceeds 250% of GDP, which alongside proactive policymaking comfortably cushions it from the sharp fall in oil prices and other external shocks.
  • We are therefore affirming our 'AA/A-1+' sovereign credit ratings on Abu Dhabi and maintaining a stable outlook.

Rating Action

On March 26, 2020, S&P Global Ratings affirmed its 'AA/A-1+' long- and short-term foreign and local currency sovereign credit ratings on Abu Dhabi, a member of the United Arab Emirates (UAE). The outlook is stable.
At the same time, we affirmed our 'AA' long-term foreign currency issue rating on the sovereign-guaranteed senior unsecured debt issued by Waha Aerospace B.V.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Abu Dhabi are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2020 EMEA Sovereign, Regional, And Local Government Rating Publication Dates," published Dec. 20, 2019, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is a sharp drop in hydrocarbon prices and our revised price assumptions for 2020 and 2021. The next scheduled publication on the sovereign rating on Abu Dhabi will be on May 29, 2020.

Outlook

The stable outlook reflects our expectation that Abu Dhabi's fiscal position will remain strong over the next two years, although structural and institutional weaknesses will likely persist.
Upside scenario
We could consider raising our ratings on Abu Dhabi if we observed pronounced improvements in data transparency, including on fiscal assets and external data, alongside further progress in institutional reforms. Furthermore, measures to improve the effectiveness of monetary policy in Abu Dhabi, such as developing domestic capital markets, could be positive for the ratings over time.
Downside scenario
We could consider lowering the ratings if we expect a material deterioration in 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% of GDP, pressure on the ratings would develop. We could also lower the ratings following domestic or regional events that compromised political and economic stability in Abu Dhabi.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil price assumptions for 2020. This follows an earlier significant downward revision of its price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions. When we last reviewed Abu Dhabi (see "Summary: Abu Dhabi," published Nov. 29, 2019), published Oct. 18, 2019), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50 in 2021, and $55/bbl from 2022 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of COVID-19. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try and maintain market share and market relevance. Oil markets are now heading into a period of severe supply-demand imbalance in the second quarter of 2020. In line with our economic outlook, we anticipate a recovery of GDP and oil demand through the second half of 2020 and into 2021 as the most severe effects of the coronavirus outbreak moderate (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020).
Abu Dhabi's economy and public finances depend significantly on oil. Therefore, 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. This cushions Abu Dhabi from the effect of oil price swings on economic growth, government revenues, and the external account, as well as increasing geopolitical uncertainty in the Gulf region. We also note 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.
In light of the lower oil prices, we project a rise in Abu Dhabi's central government fiscal deficit to about 7.5% of GDP in 2020, from 0.3% in 2019. We expect higher oil production and dividends from government enterprises will only partly offset the impact of lower oil prices. At the same time, we anticipate that authorities will increase capital expenditure, its stimulus program announced in 2019 (Ghadan 21 initiative), and contributions to the federal authorities to manage the economic and social impact of the COVID-19 pandemic. Recently announced stimulus initiatives in Abu Dhabi include UAE dirham (AED) 5 billion ($1.36 billion) for water and electricity subsidies for citizens, 20% rental rebates for restaurants and tourism-related businesses, and exemptions in registration fees for real estate, among others. We understand that the government will rationalize spending in areas that do not contribute directly to the local economy. Although long-term return assumptions on ADIA's assets indicate a general government surplus of around 8% of GDP in 2020, we recognize downside risks to 2020 investment returns due to ongoing market volatility.
To fund the higher government spending as well as maturing Eurobonds over the next two years, we expect the government will rely more on cash reserves, dividends from state-owned enterprises such as ADIA, Mubadala, and Abu Dhabi Development Holding Co. (ADDH), and external debt issuance. The government issued $10 billion of Eurobonds on Sept. 30, 2019, and will likely use the surplus funds this year.
We assess Abu Dhabi's contingent liabilities as limited relative to its net assets. The debt of Abu Dhabi's government-related entities (GREs; excluding government-owned banks) totaled about 17% of GDP as of June 30, 2019. Except for ADNOC, we do not expect the GREs will substantially increase their debt from the current levels. The recently established ADDH, which supervises several GREs--including airports, ports, and those in the media, health, and shipping sectors--will likely be the first line of defense to address any potential financial stress from an ongoing and likely worsening downturn in the non-oil sector.
We also anticipate that, in the event of financial distress, the smaller emirates would receive extraordinary financial support from the UAE (with Abu Dhabi's backing), although we do not expect the need to arise currently. We estimate outstanding direct debt of the governments of Dubai, Ras Al Khaimah, and Sharjah at about 33% of Abu Dhabi's GDP in 2019.
The sharp drop in oil prices and reduced activity due to the COVID-19 pandemic will exert significant pressure on the economy, specifically the real estate, trade, retail, and hospitality sectors. We understand that the UAE and Abu Dhabi have introduced structural measures to improve the business environment and encourage foreign investment. The Central Bank of UAE recently announced measures of AED100 billion to support the banking and corporate sectors. Nonetheless, we expect banks' loan quality will be tested and the cost of risk will increase, weighing on banks' profitability in the next 12-24 months. In 2019, banks' asset quality indicators had already started to show signs of weakness. Economic growth has been subdued over the past two years, largely as a result of oil production cuts under the 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.
We estimate a significant contraction in nominal GDP by about 20% in 2020 due to lower oil prices. In real terms, overall growth could pick up to 2.5% this year on the back of Abu Dhabi's announced plans to ramp up oil production to 4 million bbl/day and ADNOC's ambitious five-year investment plan of AED485 billion (approximately 10% of GDP annually) in the upstream, midstream, and downstream segments.
There is only limited external trade, balance of payments, and international investment position data available for Abu Dhabi. We therefore base our assessment of Abu Dhabi's external position on that of the UAE, its "host country" as per our definition. However, data gaps even at the UAE level restrict our visibility on external risks. That said, our estimates of Abu Dhabi's significant external assets, held by ADIA, lead us to assess the emirate's overall external position as a strength. We project that the UAE's narrow net external asset position, of which we expect Abu Dhabi's assets will comprise the majority, will average about 189% of current account payments in 2020-2023. However, the country's gross external financing needs are large and will spike in 2020 on the back of lower receipts from oil and gas, tourism, transport, and non-oil trade flows.
The ratings are constrained by our assessment that the emirate's political institutions are still developing, and decision-making processes remain centralized. Limited monetary policy flexibility (given the UAE dirham's peg to the U.S. dollar); gaps and delays in the provision of macroeconomic, fiscal, and external data; as well as the underdeveloped local currency domestic bond market, also weigh on the ratings.

Key Statistics

Table 1

Abu Dhabi Selected Indicators
2014201520162017201820192020202120222023
Economic indicators (%)
Nominal GDP (bil. LC)960779760814932892732843903939
Nominal GDP (bil. $)261212207222254243199230246256
GDP per capita (000s $)98.476.171.276.690.986.169.378.382.283.8
Real GDP growth4.44.92.6(0.9)1.92.02.52.02.02.0
Real GDP per capita growth(3.6)0.1(1.8)(0.4)5.61.00.50.0(0.0)(0.0)
Real investment growthN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Investment/GDPN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Savings/GDPN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Exports/GDPN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Real exports growthN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Unemployment rate3.43.74.45.05.24.04.04.04.04.0
External indicators (%)
Current account balance/GDP*13.34.93.77.39.15.8(1.7)4.35.75.9
Current account balance/CARs*13.14.83.67.09.56.4(2.1)5.16.76.9
CARs/GDP*101.1103.1103.4104.296.291.881.984.783.984.5
Trade balance/GDP*26.921.419.217.819.716.910.615.215.815.7
Net FDI/GDP*(0.2)(2.2)(1.1)(1.0)(1.1)(1)(1.0)(1.0)(1.0)(1.0)
Net portfolio equity inflow/GDP*(6.8)(4.0)(0.9)(0.8)(1.2)(1.2)(1.0)(1)(1.0)(1.0)
Gross external financing needs/CARs plus usable reserves*119.7134.9142.1137.0136.6145.1169.3164.8158.9155.3
Narrow net external debt/CARs*(112.2)(123.8)(125.2)(122.8)(132.2)(157.2)(192.4)(175.3)(176.1)(178.9)
Narrow net external debt/CAPs*(129.2)(130.0)(129.9)(132.0)(146.1)(167.9)(188.5)(184.8)(188.8)(192.2)
Net external liabilities/CARs*(157.1)(180.7)(185.2)(185.8)(196.2)(230.2)(284.5)(256.7)(256.0)(257.7)
Net external liabilities/CAPs*(180.8)(189.8)(192.1)(199.7)(216.8)(245.8)(278.7)(270.6)(274.5)(277.0)
Short-term external debt by remaining maturity/CARs*30.337.543.641.643.649.965.456.954.853.8
Usable reserves/CAPs (months)*(0.3)(0.2)(0.2)(0.2)(0.2)(0.1)(0.1)(1.0)(0.9)(0.7)
Usable reserves (mil. $)*(5,769)(5,512)(6,668)(7,385)(3,887)(3,172)(27,051)(24,703)(20,373)(19,894)
Fiscal indicators (general government; %)
Balance/GDP9.66.2(0.4)5.010.211.07.910.611.411.6
Change in net debt/GDP(12.5)(4.1)(1.9)(7.8)(16.2)(4.1)(8.6)(10.6)(11.4)(11.6)
Primary balance/GDP9.66.3(0.3)5.210.511.48.611.212.012.3
Revenue/GDP48.345.537.542.045.147.248.545.745.545.7
Expenditures/GDP38.739.337.937.034.936.140.635.134.134.1
Interest/revenues0.10.10.40.60.80.81.41.31.31.5
Debt/GDP1.41.63.87.96.812.115.814.315.317.7
Debt/revenues2.93.410.218.915.125.732.631.333.638.7
Net debt/GDP(182.0)(228.6)(235.9)(228.3)(215.4)(229.3)(288.2)(260.7)(254.8)(256.5)
Liquid assets/GDP183.4230.1239.7236.2222.2241.4304.0275.0270.1274.2
Monetary indicators (%)
CPI growth3.24.32.01.63.3(0.8)0.52.02.02.0
GDP deflator growth(1.3)(22.7)(4.8)8.012.4(6.2)(20)13.05.02.0
Exchange rate, year-end (LC/$)3.673.673.673.673.673.673.673.673.673.67
Banks' claims on resident non-gov't sector growth*6.38.05.6(0.4)3.21.32.12.62.83.0
Banks' claims on resident non-gov't sector/GDP*76.092.397.892.186.691.3102.493.890.690.2
Foreign currency share of claims by banks on residents*N/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Foreign currency share of residents' bank deposits*22.024.726.325.025.024.925.025.025.025.0
Real effective exchange rate growth*2.67.9(0.4)1.60.92.7N/AN/AN/AN/A
Sources: Statistics Centre of Abu Dhabi (SCAD) (Economic Indicators); Central Bank of UAE, International Monetary Fund, Bank for International Settlements, ADIA (External Indicators); Abu Dhabi Department Of Finance, Central Bank of UAE, International Monetary Fund (Fiscal Indicators); International Monetary Fund, Bruegel, Central Bank of UAE (Monetary Indicators).
Adjustments:Usable reserves adjusted by subtracting monetary base from reported international reserves. General government revenues adjusted by including estimated investment income from ADIA. General government liquid financial assets adjusted by including estimated assets of ADIA.
*Data is from UAE. Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Abu Dhabi Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment4Track record of sound policymaking. Reduced predictability of future policy responses due to developing political institutions and centralized decision-making process. Relatively weak transparency due to limited data availability.
Economic assessment1Based on GDP per capita ($) as per the Selected Indicators in Table 1.
External assessment2Based on narrow net external debt and gross external financing needs as per the Selected Indicators in Table 1. We base our assessment on the UAE federal level data because Abu Dhabi has limited external data. Weak disclosure at the UAE federal level restricts our visibility on external risks.
Fiscal assessment: flexibility and performance1Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. Based on liquid assets/GDP as per Selected Indicators in Table 1. These large general government liquid assets (more than 250% of GDP) provide a cushion against the volatility in oil prices and its impact on the fiscal position. Abu Dhabi has a volatile revenue base, with oil and gas revenue accounting for about 90% of the central government's revenue.
Fiscal assessment: debt burden1Based on net general government (GG) debt (% of GDP) and GG interest paid/GG revenues (%) as per Selected Indicators in Table 1.
Monetary assessment4The exchange rate reflects a conventional peg with the U.S. dollar. We assess that the UAE central bank is able to act as a lender of last resort for the financial system. Annual consumer price index is less than 10%. Market-based monetary instruments, but effectiveness may be untested in downside scenario.
Indicative ratingaa-As per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility1Abu Dhabi has large liquid financial assets, equivalent to more than 250% of GDP. This provides a significant buffer during periods of economic or financial shocks.
Final rating
Foreign currencyAA
Notches of uplift0We do not believe that default risks apply differently to foreign and local currency debt.
Local currencyAA
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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