S&P affirms Abu Dhabi's ratings and forecasts economic growth for 2018

The emirate is benefiting from higher oil prices and government spending

Apartment rents declined by 2 per cent quarter-on-quarter, while sales prices of apartments fell by 3 per cent.Christopher Pike / The National

S&P Global Ratings has affirmed its ratings for Abu Dhabi on the back of its net asset position and has forecast a return to economic growth for the emirate in 2018, thanks to higher oil prices and government spending.

“The ratings are supported by Abu Dhabi's strong fiscal and external positions,” S&P said in a report released on Sunday. “The exceptional strength of the government's net asset position provides a buffer to counteract the impact of oil price swings on economic growth, government revenues, the external account, and increasing geopolitical uncertainty in the Gulf region.”

Abu Dhabi, which is rated AA/A-1+ with a stable outlook by S&P, has strong financial buffers that have protected it over the years from oil price volatility that created budget shortfalls and slowed down the economy.

The Abu Dhabi Investment Authority, a nest-egg for future generations, is the third-largest sovereign wealth fund in the world, according to the Sovereign Wealth Fund institute.

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Higher government spending following years of austerity aimed at narrowing the fiscal deficit will help buoy growth this year.

“We project that Abu Dhabi's economic growth will rise gradually to 3 per cent by 2021 from 1.3 per cent in 2018, supported by increased oil production, planned spending on investment projects, and recovering domestic credit growth bolstered by higher oil prices and improving demand in the region,” the rating agency said.

Government spending plans in Abu Dhabi includes the three-year Dh50 billion stimulus package announced last week to propel economic growth, create jobs, and relax business regulations.

The package is accompanied by 10 initiatives that cover a range of sectors and businesses that will further boost productivity and help attract investments to the emirate.

State-owned Abu Dhabi National Oil Company has also announced plans to spend Dh165bn on the downstream energy sector to double refining capacity and triple petrochemical production by 2025. These projects will create 15,000 highly skilled jobs and add 1 per cent to gross domestic product per year.

Abu Dhabi is also expected to maintain a strong net fiscal asset position of almost 235 per cent of GDP between 2018 and 2021, one of the highest ratios in the world, S&P said.

Abu Dhabi's fiscal surplus, which included investment income from Adia's assets, rose to 9.5 per cent of GDP in 2017 from 3.6 per cent of GDP in 2016, thanks to higher oil prices, the rating agency said.

“We forecast a strong fiscal position over the next few years, supported by rising revenues and relatively smaller increases in expenditures,” S&P said. “We expect the general government fiscal surplus, including our estimate of Adia's investment income, to average 8 per cent of GDP over 2018 to 2021.”

Abu Dhabi also enjoys a low debt-to-GDP ratio, which gives it fiscal room to borrow and plug shortfalls.

General government debt more than doubled in 2017 to 7.8 per cent of GDP from 3.7 per cent of GDP in the previous year as the government’s debt financing strategy shifted from a drawdown of government deposits and assets in 2015 towards a mix of external debt and asset drawdowns, S&P noted. The move helped ease liquidity pressures in the banking system, the rating agency added.

Meanwhile, the emirate’s banking system remains strong and can weather headwinds facing the sector.

“Liquidity in the banking sector has improved and, in our view, banks are adequately capitalised and enjoy strong profitability,” S&P said. “The banks' financial situation should allow them to absorb the recent uptick in nonperforming loans in the small and midsize enterprise and retail sectors.”