Abu Dhabi's 'exceptional' fiscal strength a buffer to external shocks, S&P says

The emirate's net asset position, at more than 250% of GDP, underpins its creditworthiness, rating agency says

The Abu Dhabi skyline. The emirate's non-oil economy expanded 4.1 per cent in 2021. Bloomberg

The “exceptional strength” of Abu Dhabi government's balance sheet provides the emirate with a buffer to counteract fiscal and external shocks, as well as the effects of regional geopolitical uncertainty, S&P Global Ratings has said.

The stable outlook of the emirate, which has the highest investment grade rating in the Gulf of “AA/Stable/A-1+", underpins Abu Dhabi’s fiscal and external positions, the rating agency said on Tuesday.

The fiscal and external positions expected to remain strong over the next two years. The assessment is based on S&P’s oil price and production assumptions.

“We expect economic growth to accelerate in 2022, largely due to increased oil production and higher oil prices, which indirectly support real GDP [gross domestic product] growth,” S&P said.

Abu Dhabi’s economy made a strong rebound last year as the pace of economic activity improved on government measures to curb the Covid-19 pandemic and minimise its impact on businesses and people.

The momentum continued this year and the emirate’s economy is set to grow by 6 per cent to 8 per cent over the next two years, Mohammed Al Shorafa, chairman of the emirate's Department of Economic Development, said in April.

Growth will be driven by the oil sector, government spending, financial services and foreign direct investment, Mr Al Shorafa said at the time.

Abu Dhabi's non-oil economy grew an annual 4.1 per cent last year, driven by government’s robust economic policies, figures compiled by Statistics Centre-Abu Dhabi showed.

S&P expects Abu Dhabi's real GDP growth to accelerate to more than 5 per cent in 2022, with real GDP reaching 2019 levels in 2023.

“We estimate hydrocarbon sector growth will surge about 10 per cent in 2022, averaging about 3 per cent annually over 2023 to 2025,” S&P said.

“The non-oil sector should expand about 2 per cent annually, faster relative to the years before the pandemic when it was broadly flat, fuelled by government and GRE [government-related entities] investment programmes.”

The $121 billion investment programme of state-owned Adnoc over the 2021-2025 period, to increase oil and gas production capacity and downstream capabilities, is one such example of GRE investments that are helping to boost the economy.

“Spillover effects from the Fifa World Cup in Qatar, with visitors potentially spending some time in the UAE, could also provide a boost to economic activity,” S&P said.

The rating agency said Abu Dhabi's net asset position — or its fiscal buffer — of more than 250 per cent of GDP underpin its creditworthiness.

The government of Abu Dhabi posted a surplus of Dh37bn in 2021, or 4.4 per cent of its GDP, as revenue increased 47 per cent a year. Higher dividends from GREs contributed about 56 per cent of that increase while 41 per cent was from higher oil proceeds.

S&P expects Abu Dhabi's oil production to increase on an annual basis as Opec+ output quotas are lifted.

“We expect oil production to average 3.1 million bpd in 2022, reaching about 3.4 million bpd by 2025,” S&P said.

The rating agency assumes an average Brent oil price of $90 a barrel for the remainder of 2022 and $75 a barrel for 2023, before falling to $55 a barrel level for 2024 and beyond.

However, “to act as a buffer against oil price volatility, the government has accumulated one of the largest net asset positions of all the sovereigns we rate”, S&P said.

“We expect Adnoc, to be better placed than most global peers to weather the impact of the energy transition, supported by its large reserves, cash flow visibility and competitive cost profile,” it said.