S&P concern over Sharjah as agency changes outlook to negative

Emirate under economic pressure amid growing budget deficit spurs ratings agency to alter outlook after surge in population.

Sharjah’s economic strains and rising government budget deficit worry the credit rating agency Standard & Poor’s, which yesterday changed its outlook to negative and warned it could downgrade the emirate’s debt rating.

Despite the warning, the agency reaffirmed Sharjah’s current long and short-term debt ratings at A and A1, respectively, citing strong support it receives as a member of the UAE federation.

Although Sharjah has a relatively diverse economy and is not directly dependent on oil and gas, S&P cited its exposure to oil-dependent neighbours as the main reason for slower growth.

The rating agency also noted the sharp upwards revision to Sharjah’s population estimate after last year’s census, which had a profound impact on the calculation of its per capita GDP, dropping by a full US$10,000 per person annually.

The census revealed a whopping 63 per cent increase in Sharjah’s estimated population, and although it is a big commuter location for residents of its costlier neighbour Dubai, the huge demographic change sharply lowered S&P’s view of economic growth in the emirate.

For the period 2010-2019, S&P estimates the trend of GDP per capita growth to be just 1 per cent, the bottom of its peer group range.

“We now expect real GDP growth to average close to 2 per cent over 2016 to 2019, compared with above 3 per cent at our last review,” S&P said, and even that slower rate assumes consumption and investment will improve as oil prices stabilise, and that economic diversification continues and is able to tap into growing export markets such as India and post-sanctions Iran.

A related concern is the government’s net debt, which doubled last year to 10 per cent of GDP and is estimated to reach 14 per cent of GDP this year.

The Sharjah Government has taken measures this year – postponed from the previous year – to raise revenue, including introducing property registration fees and holding government land sales, which will increase revenue by an estimated 39 per cent this year while costs stay flat.

“We expect that deficits will decline markedly over the forecast period, reducing the annual increase in indebtedness,” S&P said, while noting that any slip up could result in a rating downgrade.

S&P also confirmed its stable outlook and ratings for both Abu Dhabi and Ras Al Khaimah, at AA/A1+ and A/A1, respectively.

S&P’s peer Fitch, meanwhile, said weaker regional demand amid the oil market downturn would slow economic growth in RAK.

“Real economic growth last year was much slower than we had anticipated, indicating that while RAK’s economy is relatively diversified, lower hydrocarbon prices have dented demand and investments,” the agency said.

While Fitch expects real economic growth in the emirate to “decelerate more than previously”, RAK’s outlook will remain stable at A on the expectation that RAK will continue posting a fiscal surplus with little net debt.

“We also factor in our expectation that, should RAK face financial stress, it would receive extraordinary financial support from the UAE, although we do not expect that need will arise,” Fitch said.

It said it could raise the ratings if the “transparency and effectiveness of RAK’s institutions materially improves”.

Follow The National's Business section on Twitter