Fitch Affirms Abu Dhabi at 'AA'; Outlook Stable

Fri Feb 21, 2014 11:33am EST

LONDON, February 21 (Fitch) Fitch Ratings has affirmed Abu Dhabi's Long-term foreign and local currency IDRs at 'AA' with Stable Outlooks. The issue ratings on Abu Dhabi's senior unsecured foreign and local currency bonds are also affirmed at 'AA'. The Short-term foreign currency IDR has been affirmed at 'F1+'. The Country Ceiling, which also applies to Ras al-Khaimah, has been affirmed at 'AA+'. KEY RATING DRIVERS The affirmation reflects the following factors: The external sovereign balance sheet is the third-strongest of all countries rated by Fitch, behind Luxembourg (AAA/Stable) and Kuwait (AA/Stable). Sovereign foreign assets are estimated to have jumped to 182% of GDP at-end 2013, from 153% one-year earlier, compared with direct sovereign external debt of just 1.2% of GDP. The anticipated repayment of a bond and the further accumulation of external assets, stemming from persistent current account surpluses, mean sovereign net foreign assets are conservatively forecast to reach almost 190% of GDP by end-2015. Fitch estimates that the fiscal position remained strong in 2013. Preliminary data suggests that government spending grew modestly and revenues rose. Fitch estimates that the fiscal surplus, including Abu Dhabi National Oil Company dividends and Abu Dhabi Investment Authority (ADIA) investment income, was comfortably in double digits as a percentage of GDP in 2013 and expects it to remain around this level for the next two years. Real GDP growth is robust compared with peers. Fitch estimates growth was 5% in 2013, driven by the non-oil sector. Fitch forecasts that high government spending, fruition of several major projects and spill over from the strengthening Dubai economy will keep growth at 4%-5% over the next two years. Average inflation was 1.3% last year, lowering the five-year average to 1.6%, well below the peer median. Debt of government-related enterprises (GREs) and state-owned enterprises (SOEs) fell slightly as a percentage of GDP in 2013, reflecting the authorities' commitment to containing indebtedness. Explicit contingent liabilities are clearly delineated and the supervision of the borrowing plans of GREs and SOEs has been tightened, with ultimate authority residing in the Executive Council (the Emirate's highest government body). Abu Dhabi's ability to support its GREs and SOEs is not in question. Potential contingent liabilities, notably support for other Emirates, is at Abu Dhabi's discretion and, as in 2009, is unlikely to be material compared with Abu Dhabi's assets, if required. The banking sector became more resilient on some metrics in 2013 in line with the strengthening of the local and Dubai economies. NPLs at Abu Dhabi banks fell to 4.8% of total loans at end-2013, the lowest since end-2009, from 5.4% at end-2012 and provisioning rose to 88% from 80% over the same period, although asset quality issues remain. Capital adequacy is high, despite dropping to 17.8% from 21.6% over 2013, due to the increase in lending growth. The economy is heavily dependent on oil, which accounts for around 50% of GDP and the bulk of fiscal and external revenues. However, oil production per capita is one of the highest in the world and supports high GDP per capita. Proven oil reserves are large, production costs are low and production capacity and downstream facilities are being expanded. Fitch does not expect a reorganisation of the largest oil concession to impact oil production. Structural indicators are mixed relative to peers. GDP per capita is among the highest of all Fitch-rated sovereigns, but human development indicators are below the median. The Doing Business score and most World Bank governance indicators have improved in recent years and are in line with the peer median, though voice and accountability is weak. The World Bank ranks political stability above the peer median and the political scene is stable. Fitch considers geopolitical risks to be elevated compared with most peers. Economy policymaking tools, primarily at the federal level, are weak, although steps to develop the policy framework continue. A macro-fiscal unit has been established at the Department of Finance and use of macro-prudential tools has increased. Nonetheless, Abu Dhabi is primarily dependent on its fiscal and external buffers to absorb shocks. Major gaps in the transparency and availability of data remain despite recent improvements. In particular, a comprehensive external balance sheet is not published. Few high frequency indicators are disseminated. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. The main factors that, individually or collectively, could lead to positive rating action are: - Addressing deficiencies in structural indicators and strengthening policymaking institutions, relative to peers, which would ultimately be conducive to reducing the economy's dependence on oil. - An improvement in the transparency and availability of key data. The main factors that, individually or collectively, could lead to negative rating action are: - A sustained period of sharply lower oil prices that materially erodes fiscal and external buffers, coupled with the crystallisation of significant contingent liabilities. - Spill over from a regional geopolitical shock that impacts economic, social or political stability. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions. Fitch forecasts Brent crude to average USD100/b in 2014 and 2015. Abu Dhabi could likely tolerate much lower prices over the forecast period without facing undue pressure on its rating. No major change is expected in ADIA's relationship with and use by the Emirate of Abu Dhabi or in its investment guidelines. Fitch assumes that regional geopolitical conflicts will not impact directly on Abu Dhabi or on its ability to trade. Contact: Primary Analyst Paul Gamble Director +44 20 3530 1623 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Richard Fox Senior Director +44 20 3530 1444 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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