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Rating Action:

Moody's affirms the United Arab Emirates' Aa2 rating; 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 rating of the Government of the United Arab Emirates (UAE). The outlook remains stable.

The rating affirmation is supported by the relatively muted impact of the pandemic on the federal government's fiscal strength, in part the result of an effective government policy response to the pandemic. While limited transparency and geopolitical risks constrain creditworthiness, the UAE's rating is supported by Moody's assumption of unconditional support from Abu Dhabi for the federal government.

The stable outlook reflects broadly balanced risks, consistent with the stable outlook on the Abu Dhabi sovereign rating. World leading progress on vaccinations should support the economic recovery, limiting the impact of the pandemic on the UAE's credit metrics, although the pace of the recovery in key sectors will vary, with trade and potentially tourism likely to recover before air passenger transportation.

The local currency (LC) and foreign currency (FC) country ceilings remain unchanged at Aaa. The LC ceiling, two notches above the sovereign rating at Aaa, reflects the UAE's predicable institutions and a strong external accounts position. The FC ceiling, also at Aaa, reflects extremely low transfer and convertibility risks given the central bank's ample foreign exchange reserves, and Moody's view that Abu Dhabi's vast sovereign wealth fund assets could be used to support the exchange rate if needed.

RATINGS RATIONALE

RATIONALE FOR THE RATING AFFIRMATION

REVENUE SHOCK FROM PANDEMIC WAS LARGELY OFFSET BY EXPENDITURE CUTS, UNDERSCORING ADJUSTMENT CAPACITY

The pandemic weakened federal government revenues last year, in particular resulting in lower VAT receipts due to the loss of tourist expenditure and weaker household consumption, as well as driving a drop in grants from the emirates. In addition, the impact of the federal government's stimulus measures, while relatively modest at just over 1% of GDP, mostly in the form of fee waivers also contributed to the decline in federal revenues. Nonetheless, the decline was almost entirely offset by reductions in federal government spending, in particular on federal grants, as well as reduced social benefit spending and declines in other federal expenditure. As a result, the federal government's fiscal deficit was just 0.2% of GDP in 2020, which was funded from existing cash balances.

Moody's expects that the federal government will launch an inaugural local currency issuance this year, but since the primary purpose of the bonds will be to establish a domestic yield curve, the higher debt burden will be accompanied by further accumulation of liquid assets, and is unlikely to significantly affect the fiscal strength of the federal government. Initially, Moody's expects this issuance will be modest, adding less than a percentage point to the UAE's consolidated government debt burden this year.

Moreover, the broader policy response to the pandemic has demonstrated the UAE's capacity to respond to shocks. At the outset of the pandemic, the UAE central bank was quick to launch the Targeted Economic Support Scheme (TESS), initially an AED100 billion stimulus package that was later scaled up to AED256 billion (equivalent to 20% of GDP). In addition to a AED50 billion zero cost funding facility provided to banks in order to reschedule the loans of borrowers affected by the pandemic, the stimulus package also included reduced deposit reserve requirements worth up to AED 61 billion, liquidity buffer relief worth up to AED 95 billion and counter-cyclical buffer and systemically important bank buffer reductions worth up to AED 50 billion to UAE banks.

The UAE was also among the first countries to begin to roll out coronavirus vaccines, which are provided free of charge to the population. Consequently, by early April, the UAE had provided at 87.55 vaccinations per 100 people, representing the second highest rate of vaccinations globally, after Israel.

ABU DHABI'S UNCONDITIONAL SUPPORT FOR THE FEDERAL GOVERNMENT BUTRESSES CREDITWORTHINESS

The affirmation of the Aa2 rating incorporates Moody's view that the Government of Abu Dhabi (Aa2 stable), the wealthiest of the seven Emirates that comprise the UAE, stands fully behind the federal government of the UAE. Limited transparency notwithstanding, this view is supported by strong institutional linkages and the Abu Dhabi government's substantial and continued financial contribution to the federal budget. Although it is unusual for a federal government to derive its credit profile from a sub-federal entity, it is explained by the UAE's unique and asymmetric federal structure, and Abu Dhabi's prominent role in the creation of the UAE.

In part because of this construct, Moody's believes it is relatively unlikely that the federal government would be called on to provide direct fiscal support on its own balance sheet to any of the emirates in a fiscal emergency, beyond the indirect support from federal government budgetary spending on shared goods and services. While the pandemic has worsened the financial performance of many government-related entities, particularly in sectors such as transportation, hospitality and tourism, the first line of support will be the emirates and their holding companies. If additional support were required, Moody's believes that it would come from Abu Dhabi rather than the federal government. Crystallization of contingent liabilities would therefore affect the UAE's creditworthiness mainly only to the extent that it affects Abu Dhabi's capacity to support the federal government.

SOME GEOPOLITICAL TENSIONS HAVE EASED, BUT REMAIN A CONSTRAINT ON THE RATING

Geopolitical tensions have eased slightly following the resumption of diplomatic relations with Qatar and the UAE's scaling back of its operations in Yemen, where is has largely withdrawn. Nonetheless, the primary source of geopolitical risk remains the 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

GREEN SHOOTS POINT TO RECOVERY IN THE NON-OIL ECONOMY, SUPPORT BY VACCINATION PROGRESS

The stable outlook reflects that risks are broadly balanced. In particular, it mirrors the stable outlook on Abu Dhabi's rating.

Moody's baseline forecast assumes that nominal GDP will recover to pre-pandemic levels over the next three years. After contracting by 6.2% of GDP in 2020 according to Moody's estimates, non-oil real GDP is expected to rebound by 3.5% in 2021, supported by the recovery in global trade and gradual improvements in the tourism sector. However, headline real GDP growth will be dampened by the continued impact of OPEC+ production constraints in the short term, which while gradually easing, will still prevent the UAE's total oil production capacity from being fully utilised.

The recovery in global trade is supportive of growth in both maritime and air cargo transportation, supported by the normalization of factory output in China and seeing re-exports returning close to pre-pandemic levels by the third quarter of 2020. Meanwhile, the UAE's progress in vaccinating its population against the coronavirus is a source of potential upside for the economic outlook, which could allow for an easing of inbound international travel, supporting a faster than expected recovery in the tourism sector, and providing a boost to the hospitality and retail sectors.

However, the extent to which coronavirus vaccinations will permit the removal of other coronavirus related restrictions in areas such as capacity reductions at restaurants and retail venues and other social distancing measures is still uncertain, and will depend on the vaccines' ability to reduce transmission rates, as well as authorities' and the population's risk tolerance. Moreover, new coronavirus variants and the unknown efficacy of vaccines against them will remain a source of downside risk.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

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

The UAE'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 climate change intensifies, the UAE is also 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. The UAE is also one of the world's ten most arid states, and rapid growth in recent decades has further increased challenges surrounding water sustainability. The majority of the UAE's water is produced by desalination plants, which are highly energy intensive and 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, and the UAE's diversified non-oil economy helps to mitigate this challenge.

The UAE's robust institutions and governance profile score supports its rating and this is captured by a positive G issuer profile (G-1). The UAE'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. Nevertheless, limited transparency on fiscal data and the size and composition of sovereign wealth fund assets, as well as poor disclosure on the financial performance and debt levels of government-related entities, constrain the credit profile.

GDP per capita (PPP basis, US$): 63,590 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.7% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -1.4% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 2.3% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 8.9% (2019 Actual) (also known as External Balance)

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 rating of the United Arab Emirates, 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

An upgrade of Abu Dhabi's rating would support an upgrade of the UAE's rating given the strong interlinkages. Furthermore (and potentially associated with an upgrade of Abu Dhabi's rating), a lasting appeasement in regional geopolitical tensions could also support an upgrade if combined with significant improvements in policy transparency and data availability at the emirate and federal level.

A downgrade of Abu Dhabi's rating would most likely result in a downgrade of the UAE's rating. Similarly, and also potentially associated with a downgrade of Abu Dhabi's rating, an escalation in domestic or regional political risk that threatened to disrupt international trade, would exert downward pressure on the UAE's rating.

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

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.
© 2021 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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