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Rating Action:

Moody's affirms Government of Sharjah's A3 rating and maintains the outlook at stable

15 Dec 2017

New York, December 15, 2017 -- Moody's Investors Service has today affirmed the long-term issuer rating of Sharjah at A3 and maintained the outlook at stable.

The key factors for affirming the A3 rating and maintaining the stable outlook are:

1. Moody's expectation that the introduction of new revenue-raising measures including VAT will reduce the fiscal deficit and stabilize government debt levels in the coming years.

2. Improved performance of key government-related issuers which has lowered the risks posed by contingent liabilities to the government's balance sheet.

3. Resilient economic strength, underpinned by a relatively diversified industrial base for a small economy and by government initiatives encouraging foreign direct investment.

Moody's has also affirmed the A3 ratings on backed senior unsecured debt issued by Sharjah Sukuk Limited and Sharjah Sukuk (2) Limited's senior unsecured debt, special purpose vehicles established by the Government of Sharjah. These trust certificates are considered direct obligations of the Government of Sharjah and their ratings automatically reflect changes to Sharjah's sovereign rating.

RATING RATIONALE

FIRST DRIVER -- BROADENING OF GOVERNMENT TAX BASE TO STABILISE DEBT LOAD

Moody's expects a number of revenue-raising measures planned for implementation in 2018 to continue to expand the government's revenue-base sustainably, providing a higher degree of predictability to government receipts. Most importantly, Moody's expects that these will include a share of revenues from the implementation of consumption taxes across the United Arab Emirates from January 2018 onwards. Although the fiscal impact in 2018 and 2019 will vary depending on the share of revenues provided to Sharjah and the level of compliance at the outset, Moody's estimates that the impact across 2018 and 2019 is likely to amount to between 6-9% of 2016 revenues. These measures will help to diversify government revenues away from a narrow base reliant on customs duties and proceeds from land sales. They should also assist the government's goal of reducing further its fiscal imbalance in the coming years. Moody's expects the government deficit to decline to 2.3% in 2017, down from 2.8% in 2016.

However, Sharjah's fiscal strength is constrained by a rising debt burden. Although government-revenues have expanded during the same period, debt accumulation has risen faster, leading to an increase in the debt/revenue ratio to an estimated 203% in 2017, up from 142% in 2014. Although indebtedness still compares favorably to similarly rated peers, failure to stabilize the debt burden close to 20% of GDP could tilt the balance of rating pressure downwards across the course of the rating horizon. Further weakening in debt and interest burden metrics would place the emirate's fiscal strength closer to Baa1-rated peers.

SECOND DRIVER -- IMPROVED PERFORMANCE OF GOVERNMENT-RELATED ISSUERS

Contingent liability risks -- historically a key ratings limitation for Sharjah -- have declined since Moody's assigned the rating. Financial performance of the largest contingent liability -- state utility company Sharjah Electricity and Water Authority (SEWA) which represents 70% of state-owned enterprises debt -- has improved substantially, reducing the need for budgetary support and lowering the risk of contingent liabilities crystalizing on the government's balance sheet. In fact, as a result of savings measures and changes to its tariff structure, SEWA is now a net contributor to the government budget.

In addition to improved financial performance, government-related issuers (GRIs) debt/GDP levels have been stable since 2014, standing at around 10% of GDP. The government does not provide blanket guarantees to GRIs but there are two outstanding explicit guarantees amounting to around 4% of GDP.

THIRD DRIVER -- ECONOMIC STRENGTH REMAINS RESILIENT

Sharjah's economy is relatively diversified for a small economy, with no single sector comprising more than a fifth of GDP. The direct contribution of hydrocarbons to the emirate's economy is relatively small compared to the UAE as a whole, cushioning the economy from oil price volatility. Sharjah has instead positioned itself as a manufacturing hub for the region, with manufacturing contributing 17% of GDP in 2016. The government continues to focus on fostering a private-sector led growth model, supported through the establishment of 18 industrial zones and two free zones, including the Hamriyah Free Zone which is the UAE's second largest industrial zone. Education and human capital formation also remain priorities, with more than 40% of the UAE national population in Sharjah attaining post-high school qualifications.

Moody's expects real GDP growth of 2.7% in both 2018 and 2019, benefiting from more favorable economic conditions at the country level and from global trade.

RATIONALE FOR THE STABLE OUTLOOK

Sharjah's stable outlook reflects Moody's view that upward and downward rating pressures are broadly balanced. On the upside, ongoing improvements in institutional development and the management and financial performance of GRIs are supportive of Moody's current assessment, negating so far the negative impact of a rising debt burden on the overall credit profile of the emirate. The stable outlook also reflects Moody's expectation that budgetary measures being deployed by the government will lead to a stabilization of the debt burden near current levels.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the sovereign's rating could arise from (1) sustained improvements in Sharjah's institutional strength; and (2) further broadening of the government's tax base that would lead to increased predictability and growth in revenues, contributing to fiscal outcomes that would materially lower the government's debt burden.

Conversely, downward pressure on the rating could come from (1) weaker than expected receipts from the planned new revenue measures, leading to further and material build-up in government indebtedness and; (2) an increase in contingent liability risks, either through rising debt accumulation or a deterioration in the performance of GRIs.

GDP per capita (PPP basis, US$): 32,684 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.1% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.4% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.8% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: N/A (also known as External Balance)

Level of economic development: High level of economic resilience

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

On 12 December 2017, a rating committee was called to discuss the rating of the Sharjah, 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 fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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 these ratings is Thaddeus Best, 9714-237-9506.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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.

Kristin Lindow
Senior Vice President
Sovereign Risk Group
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

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
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.
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