S&P affirms Abu Dhabi's ratings on its robust economic fundamentals and fiscal buffers

Credit rating agency expects emirate's fiscal position to remain strong over the next two years despite oil price fluctuations

Abu Dhabi tops the global rankings for liveability in the Middle East, followed by Dubai. Courtesy: DCT Abu Dhabi

S&P Global Ratings has affirmed the investment grade rating of Abu Dhabi, citing the resilience of its economic fundamentals and large fiscal buffers supported by revenue from the hydrocarbon sector.

The emirate's "AA/Stable/A-1+" rating and stable outlook reflect the credit rating agency’s expectation that its fiscal position will remain robust over the next two years despite oil price fluctuations.

S&P said yesterday that Abu Dhabi is in a very strong position to meet its financial commitments.

“The exceptional strength of the government’s balance sheet provides a buffer to counteract the effect of oil price swings and the effect of Covid-19 on economic growth, government revenue and external accounts, as well as the effect of high geopolitical uncertainty in the Gulf region,” the credit rating agency said on Tuesday.

Abu Dhabi’s economy is expected to recover this year on the back of higher oil prices and an improvement in economic activity as the effects of the pandemic abate.

The emirate’s real gross domestic product is expected to recover to 2019 levels by 2023, according to S&P estimates.

International benchmark Brent, under which two thirds of the world's oil is traded, rose by 2.76 per cent to trade at $71.23 a barrel at 6.32pm UAE time while West Texas Intermediate, which tracks US crude grades, was up 3.57 per cent at $68.69.

S&P also expects that Abu Dhabi’s oil production – which it said declined to an average of 2.8 million barrels per day in 2020, from 3.1 million bpd a year earlier – will return to 2019 levels by 2024.

“As a result, we project hydrocarbon sector growth of about 2.7 per cent annually over the forecast period,” said S&P.

“The non-oil sector should increase by about 1.7 per cent annually, an acceleration in the pace of growth relative to the years prior to the pandemic, fuelled by government and GRE [government-related entities] investment programmes”.

Abu Dhabi's economy is poised to grow by 6 per cent to 8 per cent over the next two years, driven by government spending, financial services and foreign direct investment, Mohammed Al Shorafa, chairman of the emirate's Department of Economic Development said last month.

Structural measures introduced by the UAE and Abu Dhabi to improve the business environment should enhance labour market flexibility, attract foreign workers and boost investment inflows as the emirate’s economy continues to recover, S&P said.

The measures include a new Foreign Direct Investment Law that permits foreign investors to fully own businesses in various sectors and the liberalisation of personal and family law.

In May, the Abu Dhabi Department of Economic Development revealed a list of 1,105 registered commercial and industrial activities that are open to partial or full foreign ownership in the emirate from June 1.

S&P expects Abu Dhabi's fiscal and external net asset positions to remain strong from this year up to 2024.

“To act as a buffer against oil price volatility, the government has accumulated one of the largest net asset positions of all sovereigns we rate,” the credit rating agency said.

The government has “proactively implemented fiscal reform measures since the sharp fall in oil prices in 2015”, it said.

Abu Dhabi cut expenditure last year and kept the central government deficit at about 5 per cent of GDP to counter low oil prices and the global coronavirus-induced slowdown, S&P said.

The credit rating agency expects a central government fiscal deficit of about 1 per cent of GDP in the 2021 to 2024 period, “with the budget broadly balanced in 2021 and 2022”.