Abu Dhabi still highest-rated sovereign entity in region

Ratings agency Standard and Poor's maintains Abu Dhabi's credit rating at "AA" with a stable outlook, but says that government transparency and geopolitical tensions remain areas of concern.

Standard & Poor's, the global credit ratings agency, has upheld Abu Dhabi as the region's highest-rated sovereign entity, saying the emirate's oil wealth and political coherence had granted it a "stable" outlook.

However, the report added that factors such as geopolitical risks, low levels of transparency at a government level and limited availability of financial and economic dataall counted against the emirate.

"We believe that Abu Dhabi's economy is weathering the global downturn well, despite increased contingent liabilities from the financial sector and Dubai," said a report from the agency. "The emirate in our opinion has significant flexibility to face these challenges by virtue of its large resource endowment and financial asset holdings."

A credit rating from an agency such as S&P, Fitch or Moody's is used by international investors to gauge the creditworthiness of a country or corporation that auctions its debts. Typically, a higher credit rating permits borrowing at a lower cost.

Jarmo Kotilaine, the chief economist at NCB Capital, said government openness, whether in terms of regular statistical data or the relationship between the Emirates and Federal Government, could still be improved.

"Getting a grip on what's going on isn't that easy," he said. However, the emirate's "stable" ratings should give cheer to local companies seeking to issue bonds, he said.

"Many of the big sources of market uncertainty have disappeared and the default assumption as to the UAE has flipped from anxiety to confidence on the whole," said Mr Kotilaine. Some companies would see the benefits of lower borrowing costs as Abu Dhabi's ratings improve, he said.

"The key question will be how far this trickle-down effect will go through the economy," he said. "It has been a number of key players in the utilities sector and government-related entities that have seen benefits in the past."

The affirmation of Abu Dhabi's "AA" rating leaves it as S&P's highest-rated sovereign entity in the Middle East, alongside Qatar, which shares an "AA" rating.

Moody's rates the Emirate "Aa2". Tristan Cooper, the head analyst for Middle East sovereigns at Moody's, said Abu Dhabi's relationship with nearby countries was the greatest area of concern over its credit rating.

"The sheer strength of the public finances relative to other sovereigns means that the emirate would likely be rated higher if it were not for the geopolitical discount," he said.

"Transparency and institutional issues are a negative rating factor but they are less important for us than the regional political context."

Fitch Ratings also recently ranked the emirate "AA" with a "stable" outlook, which it said was "anchored by one of the strongest balance sheets of any rated sovereign".