S&P maintains strong Abu Dhabi ratings despite low oil prices

Ratings agency S&P has maintained its strong ratings for Abu Dhabi despite the impact of low oil prices on the emirate’s economy.

In its latest report, S&P affirmed its ‘AA’ long-term and ‘A-1+’ short-term foreign and local currency sovereign credit ratings on Abu Dhabi, with a stable outlook.

“The ratings are supported by Abu Dhabi’s strong fiscal and external positions,” it said.

“The exceptional strength of the government’s net asset position provides a buffer to counter the negative impact of oil price declines on economic growth and government revenues, as well as on the external account.”

S&P said it projects the emirate’s net fiscal asset position at about 260 per cent of GDP on average over 2016-2019.

“This is one of the highest net government asset ratios among the sovereigns we rate.”

The agency previously projected the government’s net asset position over 2016-2019 at 320 per cent of GDP.

Meanwhile Abu Dhabi’s GDP per capita is projected to reach about $68,000 in 2016.

“The average change in real GDP per capita, weighted as per our criteria, will likely show a contraction of about 3 per cent on average in 2016-2019, largely due to high levels of immigration,” the report said.

The emirate’s population increased by 70 per cent between 2008 and 2015 to 2.8 million, and will reach about 3.5 million by 2020.

“Real GDP per capita growth is well below that of peers in the same GDP-per-capita category. But, in our view, wealth levels in the economy could substantially cushion potential risks,” S&P stated.

Abu Dhabi’s nominal GDP fell by about 14 per cent in 2015, due to the sharp drop in oil prices. But the real economic growth rate at 6 per cent was much stronger than the previously expected 2 per cent, as oil production increased.

In 2015, Abu Dhabi derived about 50 per cent of its real GDP and 80 per cent of government revenues from the hydrocarbons sector: oil taxes and royalties, plus dividends from state-owned oil producer, refiner, and distributor Abu Dhabi National Oil Co (ADNOC).

With revenues declining by 21 per cent due to falling oil and gas income, S&P estimates that the general government deficit will widen to 5 per cent of GDP in 2016, from around 4 per cent in 2015.

“We project Abu Dhabi’s fiscal balance will show a deficit of about 4 per cent of GDP on average in 2016-2019,” it said.

“We assume an average Brent oil price of $46 per barrel in 2016-2019. In our view, government policy to encourage the economic contribution of the non-oil private sector is likely to have a significant effect only over the medium to long term,” the report added.

The Abu Dhabi government has implemented measures such as cutting utility subsidies and introducing fixed fuel prices, which have helped the economy.

“The stable outlook on Abu Dhabi reflects our view of balanced risks to the ratings over the next two years. We believe that Abu Dhabi’s economy will remain resilient and its fiscal position will remain extremely strong, but we also anticipate continued structural and institutional weaknesses,” the report stated.

S&P would consider a negative rating action if domestic or regional events compromised the political and economic stability in Abu Dhabi.

It added: “We could consider raising the ratings on Abu Dhabi if we observed pronounced improvements in data transparency, including on fiscal assets and external data, alongside further progress in institutional reforms.

“What’s more, measures to improve the effectiveness of monetary policy, such as developing domestic capital markets, could be positive for the ratings over time.”