RAK and Bahrain on upward trajectory, S&P says

Emirate's outlook upgraded to stable while Bahrain will reduce its deficit significantly, agency says

Ras Al Khaimah, United Arab Emirates - August 19, 2018: General view of the office of RAK Gas. Sunday, August 19th, 2018 at RAK Gas, Ras Al Khaimah. Chris Whiteoak / The National
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Ratings agency S&P said Ras Al Khaimah will post larger fiscal surpluses and lower government debt servicing ratios than previously assessed on the back of revenue sources from state-owned enterprises that are becoming much like general government departments.

The agency revised its outlook to stable from negative on the emirate to reflect expectations that the government's fiscal position will remain strong, supported by additional streams of revenue. It affirmed its long and short-term foreign and local currency sovereign credit ratings at A/A-1.

RAK's helathy fiscal position, low level of government debt, and the advantages that it derives from its membership in the UAE, including low external risks and the agency's belief that the UAE would provide extraordinary support to RAK, if needed, all support its outlook, S&P said.

"We expect that revenue sources from state-owned enterprises [SOEs] that are becoming akin to general government departments, will help Ras Al Khaimah post larger fiscal surpluses and lower government debt servicing ratios than previously assessed," S&P said.

The government's debt burden decreased in October with a sukuk redemption and it has also begun a process of merging some SOE activities into the general government, as such activities are more closely aligned with government services.

"We understand this process is ongoing and we expect revenues will increase as the government makes more institutional changes," the agency said.

The UAE Federal Government covers a large portion of expenditure that would otherwise fall to RAK. These costs include public health care, education, energy provision and defence. Major infrastructure and social projects - such as the development of schools, hospitals, truck roads and the provision of adequate energy generation and distribution - are also borne at the federal level. As a result, RAK's expenditure base as a percentage of GDP remains low, averaging just under 8 per cent of GDP over the forecast period, S&P said.

"We continue to view RAK's debt burden as limited. Gross debt has been declining in absolute terms since 2013. We estimated debt at 11 per cent of GDP at year-end 2018, with a maturing sukuk redeemed in October. Debt will continue on a downward trend," the agency said.


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The matured sukuk also contributed to a fall in the interest burden, which S&P estimated at 5.1 per cent of revenues in 2018.

"We expect the government will remain in a net asset position of about 4.5 per cent of GDP and real GDP growth of 2.5 per cent in 2018, continuing through 2010 and supported by increased capital expenditure in Dubai and Abu Dhabi.

Also yesterday, S&P said the Bahrain government will use the window of opportunity provided by pledged financial support from other GCC states to accelerate the pace of fiscal consolidation against external risks, S&P Ratings said, as the agency affirmed its B+/B rating on long and short-term foreign and local currency sovereign credit for the nation.

The agency said the outlook remains "stable". It expects real economic growth to average 2.5 per cent over 2018-2021.

In October, The National reported that the UAE, Saudi Arabia and Kuwait pledged $10 billion in financial support for Bahrain's reforms package that aims to eliminate the kingdom's budget deficit by 2022. Bahrain's Fiscal Balance Programme, drawn up after a thorough review of government spending, aims to achieve annual savings of 800 million Bahraini dinars (Dh7.8bn). It builds on previous fiscal consolidation efforts that yielded annual savings of 854m dinars during 2015-2017, the Bahrain News Agency said at time.

"We expect the government's budget balance to remain in deficit over our forecast period, due to our view that some of the government's budgetary consolidation measures might be less effective than planned," S&P said. "Nevertheless, we expect the vast majority of financial support to be disbursed because of Bahrain's importance to donor countries."

Bahrain plans to balance its budget by 2022 with measures focusing on increasing revenue capture from the non-oil sector of the economy. Currently, fiscal revenues are heavily oil-dependent, despite the oil sector contributing less than 20 per cent to GDP, according to S&P.