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Rating Action:

Moody's affirms Abu Dhabi's Aa2 ratings; maintains stable outlook

04 May 2021

New York, May 04, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Aa2 long-term issuer and senior unsecured ratings of the Government of Abu Dhabi. The outlook remains stable. Moody's has also affirmed the P-1 short-term issuer rating, the (P)Aa2 long-term and (P)P-1 short-term MTN programme ratings.

The rating affirmation reflects Abu Dhabi's very strong balance sheet and very high per capita income that bolster credit resilience, as well as robust institutional strength evident in the government's capacity to adjust fiscal policy to respond to shocks, in particular periods of lower oil prices. Meanwhile, the Aa2 long-term issuer rating takes into account long-term credit constraints such as reliance on hydrocarbons, limited transparency and ever-present geopolitical risk.

The stable outlook reflects Moody's expectation that Abu Dhabi's fiscal strength will remain resilient to downside risks to the oil market posed by global pandemic developments and management, given the vast size of Abu Dhabi's financial buffers and the government's track record at adjusting to worse-than-earlier expected environments.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL443463 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION

VERY STRONG BALANCE SHEET AND DEMONSTRATED ADJUSTMENT CAPACITY MITIGATE FISCAL SHOCK FROM THE PANDEMIC

The rating affirmation reflects Abu Dhabi's very strong balance sheet, with assets in the Abu Dhabi Investment Authority (ADIA) estimated to amount to more than four times GDP that, combined with the government's demonstrated track record of effective fiscal policy response, preserve fiscal strength in the event of oil price shocks.

While Abu Dhabi's government debt increased to an estimated 22.7% of GDP in 2020 from 11.8% a year earlier, the increase is from a low base and moderate in comparison to other hydrocarbon exporting sovereigns in the Gulf Cooperation Council (GCC) and other sovereigns worldwide.

Only modest fiscal support helped preserve the government balance sheet. While the government's Ghadan 21 stimulus package provided some support to the economy, in contrast to many advanced economies Abu Dhabi (as well as the federal government and other emirates of the UAE) did not provide any form of wage support, either directly to employees or businesses. As a result, the overall size of fiscal stimulus was fairly modest at 1.3% of GDP in 2020. Instead, policy support for individuals and businesses affected by the pandemic has mainly been provided by the United Arab Emirates (UAE) central bank. As a result, the economic shock was muted, in turn diminishing the need for more significant fiscal support.

The overall impact on the fiscal balance from last year's oil price shock was also mitigated by reductions in government expenditure, which resulted in a fiscal deficit of around 6% of GDP according to Moody's estimates and definition.

Looking forward, the recovery in oil prices should help to support a narrowing of the fiscal deficit, which Moody's forecasts will decline to an average of 3.4% of GDP between 2021 and 2023, almost half the size of last year's estimated deficit.

HYDROCARBON RELIANCE, LIMITED TRANSPARENCY AND GEOPOLITICAL RISK CONTINUE TO CONSTRAIN CREDITWORTHINESS

Abu Dhabi's Aa2 long-term issuer rating takes into account long-term challenges that constrain creditworthiness. These include the government's reliance on hydrocarbon-related revenue, limited transparency on fiscal data and the size and composition of sovereign wealth fund assets, as well as poor disclosure on government-related entities, which constrain the credit profile.

Notwithstanding the introduction of non-oil revenue measures such as VAT in 2018, government revenues remain highly dependent on hydrocarbons via royalties, taxes, concessions as well as dividends from the Abu Dhabi National Oil Company (ADNOC). Considering the limited pipeline of new non-oil measures, and the planned expansion of hydrocarbon production by ADNOC, Moody's does not expect this dependence to reduce significantly over the medium term, exposing Abu Dhabi to a global transition to lower consumption of hydrocarbons.

Fiscal transparency remains relatively constrained, reflected in the limited scope and frequency of Abu Dhabi's official economic data, the absence of public figures on prospective budgets and budget execution, and on the size and composition of offshore assets managed by the Abu Dhabi Investment Authority (ADIA). Moreover, there is no public disclosure of the financial performance and debt levels of government-related entities (GREs), that, across the UAE, pose contingent liability risks to Abu Dhabi.

Despite the easing of some aspects of geopolitical risk following the resumption of diplomatic relations with Qatar and the UAE's scaling back of its operations in Yemen, geopolitical risks remain a constraint on the rating at the Aa2 level. The primary source of geopolitical risk remains regional tensions with Iran, and the potential for a conflict to emerge which could lead to a blockade of the Strait of Hormuz, which is the primary shipping route for oil exports from the UAE and most GCC sovereigns.

RATIONALE FOR MAINTAINING THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Abu Dhabi's fiscal strength will remain resilient to the potential materialization of downside risks related to global pandemic developments and management, as seen during previous periods of lower oil prices.

Meanwhile, world leading efforts by Abu Dhabi, as well as the federal government and other emirates' health authorities, to vaccinate the population should support the economic recovery. Abu Dhabi had started vaccinating frontline healthcare workers and government officials as early as September 2020, and extended this to the general population by December. As of April 2021, more than 65% of the eligible UAE population had been fully vaccinated (Emirate level data on the percentage of the population vaccinated is not published). Combined with the UAE central bank's pledge to extend the zero-cost funding facility until June 2021 (and potentially further if needed), this should support the recovery in the non-oil sector in Abu Dhabi.

Moreover, the planned expansion of oil production capacity will further support government revenues over the medium term. ADNOC's $122 billion investment plan aims to increase oil production by 25% to 5 million barrels per day by 2030, taking advantage of low costs of production to seize market share from producers with higher lifting costs and the scaling back of exploration activities by international oil companies.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Abu Dhabi's ESG Credit Impact Score is moderately negative (CIS-3), reflecting high exposure to environmental risks, balanced against strong institutions and governance strength which supports the government's capacity to respond to these risks. Social risks are low.

Abu Dhabi's high exposure to environmental risks, reflected in its E-4 issuer profile score, mainly relates to the economy's dependence on the hydrocarbon sector (albeit low hydrocarbon production costs provide a degree of insulation to carbon transition), as well as its dependence on desalinated water, and exposure to rising sea levels. As climate change intensifies, the UAE is among the sovereigns most exposed to rising sea levels in the future, with up to 10% of the population exposed under a scenario where sea levels rise by one metre, thus increasing its sensitivity to environmental risk, and Abu Dhabi's coastal capital -- where the majority of the emirate's population live -- is vulnerable to these changes. The UAE is also one of the world's top ten most arid states, and rapid growth in recent decades has further increased challenges surrounding water sustainability. The majority of the Abu Dhabi's water is produced by desalination plants, which are highly energy intensive and which are vulnerable to oil spills from marine traffic in the Gulf.

Exposure to social risks is low (S-2 issuer profile score). The main source of pressure arises from the young demographics which will drive rapid growth in the labour force over the coming decades. The effectiveness of labour market nationalisation policies in keeping unemployment low among citizens will remain an important consideration for social risks for the foreseeable future. However, the very low proportion of citizens relative to the labour force and overall population mitigates this risk.

Abu Dhabi's strong institutions and governance profile score support its rating and this is captured by a positive G issuer profile (G-1). Abu Dhabi's institutions and governance strength has been demonstrated by the spearheading of reforms destined to improve the business environment, and the progress made on diversifying the economy and fiscal revenues away from the hydrocarbons sector.

GDP per capita (PPP basis, US$): 133,672 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.5% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -1% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 0.3% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: [not available]

External debt/GDP: [not available]

Economic resiliency: a1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 29 April 2021, a rating committee was called to discuss the ratings of Abu Dhabi, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's governance and/or management, have not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Prospects of significant diversification of economic activity from hydrocarbons and an associated decline in the government's dependence on hydrocarbon revenues would likely prompt an upgrade of Abu Dhabi's ratings. A more positive assessment of Abu Dhabi's creditworthiness would also involve greater transparency over fiscal policy and the size and composition of government assets, and declining contingent liability risks from government-related entities (GREs).

Conversely, a prolonged period of oil prices well below Moody's current assumptions would likely prompt a rating downgrade if not accompanied by effective measures to preserve the government's fiscal strength. A rising probability that large contingent liabilities posed by GREs may crystallise on the government's balance sheet would also likely prompt a rating downgrade.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

The local market analyst for this rating is Thaddeus Best, +971 (423) 795-06.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL443463 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
Vice President - Senior Analyst
Sovereign
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marie Diron
MD - Sovereign Risk
Sovereign
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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