Moody’s affirms UAE’s rating as diversification efforts strengthen

Emirates is moving economy away from oil by developing sectors such as technology, manufacturing, tourism and trade

Visitors outside the Louvre Abu Dhabi. Moody's says geopolitical risks are partly mitigated by Abu Dhabi's very large government financial assets that support the government's capacity to absorb shocks. Khushnum Bhandari / The NationalShow less

Moody's Investors Service has maintained the UAE’s "Aa2" long-term local and foreign currency issuer ratings with a “stable outlook” as the Emirates continues to strengthen economic diversification efforts and boost non-oil sector growth.

“Aa” ratings are considered be of high quality and subject to very low credit risk. "Aa2" is the third highest rating on Moody's scale.

“The affirmation reflects our expectation that the debt burden of the federal government will remain very low, supported by its long-standing adherence to a balanced budget policy and its limited spending needs due to fiscal decentralisation,” the rating agency said late on Thursday.

It also takes into account Moody’s expectation of continued strong support from the government of Abu Dhabi, which plays a pivotal role in the UAE federation, it said. “We expect the UAE's credit profile to continue to benefit from Abu Dhabi's very strong balance sheet, which supports the sovereign’s capacity to absorb shocks,” Moody’s said.

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“Although the UAE is exposed to longer-term carbon transition risks and persistent regional geopolitical tensions, effective policymaking mitigates these challenges, including by advancing economic diversification.”

The UAE’s economy grew by 3.8 per cent during the first nine months of 2024, driven by a strong expansion in non-oil sectors.

Real gross domestic product of the Emirates for the nine-month period to the end of September rose to Dh1.32 trillion ($359.4 billion). The non-oil economy grew by 4.5 per cent annually to Dh987 billion, accounting for nearly 75 per cent of the country's economic activity, while the oil sector made up the rest, state news agency Wam reported this month.

The UAE, the country with the Arab world's second-largest economy, has been focusing heavily on diversifying away from oil by developing sectors such as technology, manufacturing, tourism, trade and innovation. The country has introduced several reforms including longer-stay residence visas as well as new visa categories to attract more talent.

Last September, the UAE Central Bank said it expected the country's economy to grow by 4 per cent last year, an increase from its June estimate of 3.9 per cent, on the back of a boost from its non-oil sector. Growth will also be supported by economic agreements the country has signed with its global trade partners, the regulator said at the time.

The UAE's non-oil foreign trade also hit a record Dh3 trillion last year − up 14.6 per cent year-on-year.

The Comprehensive Economic Partnership Agreements with various nations, from Colombia to Australia, have contributed Dh135 billion to the Emirates’ non-oil trade with partner nations, an increase of 42 per cent compared to the previous year, Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, said in February.

Cepas are created to reduce tariffs and remove bottlenecks that hamper trade. This programme is projected to increase national exports by 33 per cent and add more than Dh153 billion to the economy by 2031.

Moody’s said on Thursday that the stable outlook reflects efforts by the federal government to “expand non-hydrocarbon revenue streams, promote the development of non-hydrocarbon sectors and improve attractiveness of the UAE for foreign investment and talent”, strengthening the country’s overall credit profile.

“This potential upside is balanced by downside credit risks embedded in the UAE's exposure to regional geopolitical tensions that could disrupt the economy's strong diversification momentum and weigh on its longer-term growth prospects,” the agency said.

The UAE government's revenue in the first half of 2024 surged 6.9 per cent on an annual basis to Dh263.9 billion or 26.9 per cent of GDP, driven by a substantial 22.4 per cent year-on-year increase in tax revenues, according to the government data.

Meanwhile, persistent regional geopolitical tensions remain a latent tail risk, notwithstanding the UAE's efforts to nurture good relations across the entire Middle East region, Moody’s said. “An escalation of third-country tensions into a military conflict could disrupt the UAE's ability to produce and export oil, including through the Strait of Hormuz, while increasing perceptions of risk and instability in the region that could weaken its long-term economic diversification prospects.”

It added that the geopolitical risks are partly mitigated by Abu Dhabi's very large government financial assets that support the government's capacity to absorb shocks.