The UAE, which has the highest rating in the GCC along with Kuwait and Qatar, has been ranked at "very high” by Moody's in terms of fiscal strength, reflecting the sound capacity of the government to mobilise resources to repay its debt.
The global ratings agency said in its latest credit analysis that such a very high score is shared only by countries including Luxembourg (Aaa stable), Hong Kong (Aa1 stable) and Switzerland (Aaa stable). "The outlook on the UAE's Aa2 foreign and local-currency government issuer ratings has been stable since we upgraded it by one notch in 2007,” a Moody's Investor Service report said.
The UAE's ranking is supported by large consolidated fiscal surpluses, a moderate level of consolidated direct government debt and the public sector's sizeable stock of offshore assets, mainly held by Abu Dhabi, it said.
"We expect low oil prices to considerably reduce the surplus this year, but not dent overall fiscal strength. Absent structural reforms, however, a protracted period of low oil prices would weaken the UAE's buffers,” Moody's said.
The UAE's consolidated government debt is low and stable at 26 per cent of the gross domestic product in 2013. "This takes into account the direct government obligations of the governments and official entities. About 75 per cent of debt is domestically held, primarily by local banks. However, this figure does not take into account debt incurred by state-owned enterprises and masks disparities between Abu Dhabi and Dubai,” it said.
In 2014, government debt is scheduled to increase in Dubai and the Northern Emirates. The government of Dubai issued a $750 million sukuk in April 2014, while Sharjah issued a debut $750 million sukuk in September 2014.
Moody's noted that vast hydrocarbon reserves and the robust balance sheet of the combined emirate and federal governments underpin the UAE's fiscal strength. With the exception of 2009, it has recorded 10 years of consolidated surpluses that have enabled it to accumulate large external reserves, most of which are in the Abu Dhabi Investment Authority, the third-largest sovereign-wealth fund in the world. Other credit strengths include the UAE's sound policy framework, a primary driver of the UAE's rapid non-oil growth and resilience to past oil price shocks, the ratings agency explained.
Moody's argued that the recent oil price decline did not dent the UAE's fiscal strength as the country benefits from several buffers. The country's fiscal breakeven oil price has fallen back below $80 and Abu Dhabi's reserves will continue to smooth the impact of oil price cycles.
"However, the country's non-oil economy is relatively leveraged and exposed to a regional slowdown, given Dubai's focus on logistics, trade and transport,” it said.
The report pointed out that there are two constraints on the UAE's rating. First, transparency is limited in the government-related institutions sector and in the public dissemination of economic and fiscal data. Second, geopolitical dynamics pose low-probability, high-impact risks for the Gulf. Current causes for concern include destabilising violence in Iraq and tensions surrounding Iran's nuclear programme.
Moody's credit analysis elaborates on the UAE's credit profile in terms of economic strength, institutional strength, fiscal strength and susceptibility to event risk.
"We assess the UAE's economic strength at very high, based on its high per capita income, competitive non-oil sectors and hydrocarbon reserves that are both large and accessible. With a GDP per capita of $63,180 per capita PPP, the UAE ranks similarly to Norway [$64,363], Switzerland [$53,976] and the United States [$53,001].
Moody's noted that the UAE's economy is particularly diversified relative to Kuwait and Qatar and benefits from developed capital markets and a benign business environment.