S&P affirms Abu Dhabi’s rating, as vast wealth helps emirate cushion oil price decline

Standard & Poor's projects Abu Dhabi’s annual average fiscal deficit at about 1.5 per cent of GDP between this year and 2018.

Abu Dhabi's vast accumulated wealth provides a buffer against the impact of declining oil prices, says Standard & Poor's.

Maintaining the emirate’s long-term debt rating at AA, a notch below its highest AAA rating, the credit ratings agency said in a report on Friday that Abu Dhabi’s credit rating reflects “the exceptional strength of its net asset position [which] provides a buffer to counter the negative impact of oil price declines on economic growth and government revenues”.

S&P’s assessment echoes that of others, including last week’s bellwether annual report from the IMF.

The IMF made similar points about the economy’s ability to weather the adverse effect on government revenues that the plunge in oil prices in the past year have caused. It also pointed to the need for continued progress on economic diversification and institutional reform.

S&P said it was assuming that the benchmark North Sea Brent crude prices would average about US$55 per barrel this year, rising to $65 next year and $75 the year after.

The report noted that Abu Dhabi derives 90 per cent of government revenues from the hydrocarbons sector, while 55 per cent of the emirate’s GDP is made up of oil and gas-related revenues.

S&P projects Abu Dhabi’s annual average fiscal deficit at about 1.5 per cent of GDP between this year and 2018.

“We previously expected a surplus of 2 per cent of GDP over the same period,” the report said. Government spending is forecast to fall by 28 per cent by 2018, mainly from additional cuts in Abu Dhabi’s contribution to the UAE’s federal expenditure, which made up a third of the budget last year, as well as cuts to aid payments and grants. But S&P expects a 10 per cent increase in Abu Dhabi’s spending on development projects to support economic growth.

However, S&P reiterated long-standing caveats it says are holding back the emirate’s sovereign debt rating.

“We see Abu Dhabi’s economy as undiversified, despite government policy to encourage non-oil private sector growth,” S&P said. “[Also] there are substantial shortcomings and material gaps in the dissemination of macroeconomic data, including relatively weak transparency and reporting delays.”

Abu Dhabi’s credit rating could improve if it made itself more transparent, it said.

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