Moody's affirms UAE government and Abu Dhabi's ratings on fiscal strength

Outlook for both remains stable

UAE's Ministry of Economy has cancelled fees on 102 government services. Chris Whiteoak / The National

Moody's Investors Service affirmed the long-term issuer rating of the  UAE government and the emirate of Abu Dhabi at Aa2 on the back of the sovereign's fiscal strength, very low government debt and vast sovereign assets.

The outlook of the federal government and the emirate of Abu Dhabi remains stable, Moody’s said in two separate statements.

The rating affirmation for the UAE federal government is supported by “strong credit fundamentals including very high fiscal strength, broadly balanced budget, negligible or very low federal government debt, high wealth levels and robust institutions”, Moody’s said.

The ratings agency projects “no or very low federal government debt in the foreseeable future and very high fiscal strength for the UAE, even as new debt issuance powers have recently been bestowed to the federal government".

Last year, the UAE issued a law permitting the federal government to issue sovereign debt for the first time, helping to boost banking liquidity and enable individual emirates to benefit from higher issuer ratings than they could achieve on their own. Previously, individual emirates of Abu Dhabi, Sharjah and Dubai had issued their own debt.

Prospects for a medium-term increase in economic activity, revenue from the hydrocarbon sector and reforms aimed at developing the non-oil industry are among the factors supporting the ratings of Abu Dhabi, Moody's said. The stable outlook of the emirate indicates that the risks are broadly balanced, supported by current oil prices and upside potential from continuing diversification efforts, it said.

The government of Abu Dhabi, which has the biggest hydrocarbon reserves among the seven emirates, stands fully behind the federal government and there are strong institutional linkages between the two. The federal budget derives over a quarter of its revenues in the form of grants from Abu Dhabi and the emirate's strong financial position, which Moody's expects to be maintained, will support the federal government's revenues.

“Abu Dhabi's debt-to-GDP ratio will remain under 10 per cent in the foreseeable future despite a likely shift in policy focus towards supporting the economy from fiscal consolidation,” according to Moody’s.

After a period of fiscal restraint, the emirate has boosted spending and in June last year announced plans to implement a Dh50 billion three-year stimulus package. These relatively modest increases in spending have been matched by more significant increases in hydrocarbons revenues, Moody’s added.

Apart from the hydrocarbon revenues, the implementation of VAT in January last year has also expanded the government's non-oil revenue base.