New York, July 18, 2019 -- Moody's Investors Service ("Moody's") has today
changed the outlook on the Government of Sharjah's long-term
issuer ratings to negative from stable and affirmed the long-term
issuer ratings at A3.
The negative outlook reflects the government's deteriorating fiscal
position which, in the absence of significant fiscal consolidation
measures, would point to credit metrics consistent with a lower
rating.
The A3 rating continues to be supported by a reasonably well diversified
economy, relatively high income levels, low non-financial
public sector debt, and its membership within the federal structure
of the United Arab Emirates (Aa2 stable).
The affirmation of the A3 rating also applies to the senior unsecured
debt ratings of Sharjah Sukuk Limited, Sharjah Sukuk (2) Limited
and Sharjah Sukuk Programme Limited. The (P)A3 senior unsecured
MTN programme of Sharjah Sukuk Programme Limited was also affirmed.
In Moody's opinion, the payment obligations of the notes issued
by these entities are direct obligations of the government and ranked
pari passu with other senior, unsecured debt issuances of the government.
RATINGS RATIONALE
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the government's deteriorating fiscal
position which Moody's expects to continue unless significant consolidation
measures are taken.
Spending increases have outweighed revenues, resulting in the further
accumulation of government debt. Debt-to-GDP increased
to 25.4% in 2018 from 19.5% in 2017,
now more than twice the level when the sovereign rating was first assigned
in 2014. Meanwhile, debt-to-revenues rose to
246% in 2018 from 209% in 2017, which is significantly
higher than the A-rated median. While the revenue from the
newly-introduced VAT will lower this ratio in 2019, Moody's
expects the debt burden to rise again from next year.
New revenue raising measures introduced in 2018 had mixed outcomes.
The government's main own-source revenue measure introduced
last year -- an increase to road tolling rates for heavy vehicles
-- did not raise as much additional revenue as the government expected.
By contrast, the AED1.6 billion share of federal-collected
VAT revenues allocated to Sharjah was significantly higher than the government
initially anticipated, although the disbursal of these receipts
from the federal government was delayed until the first half of 2019.
The revenue shortfall for 2018 was only partially offset by an acceleration
of the 2019 budget contribution from Sharjah Electricity and Water Authority.
Meanwhile, the government's existing revenue streams continued
to be volatile. All in all, while growth in revenues was
below the government's expectations, expenditure exceeded
the budget by 9.3% and overall was 24% higher than
in 2017, as a result of both higher current spending relating to
salary increases and larger capital expenditure.
As a result, Sharjah's budget deficit increased to 4%
of GDP in 2018 from 2.8% in 2017. While the disbursement
of two years of accrued VAT revenues is likely to narrow the budget deficit
on a cash basis in 2019, Moody's expects the budget deficit
to widen again in 2020 as the disbursal of VAT revenues begins to align
more closely with the timing of their generation.
In addition to higher financing needs for the government budget,
the government's recapitalization of Invest Bank also contributed
to the increase in the debt burden, as did the incorporation of
municipal debt into the classification of Sharjah's government debt
last year.
With a renewed widening of the deficit in the absence of new fiscal consolidation
measures, Moody's expects that the debt burden (measured relative
to GDP) will continue to rise in the next few years.
RATIONALE FOR AFFIRMING THE A3 RATING
Sharjah continues to benefit from a relatively diversified economy.
In particular, Sharjah's economy is more diversified than the UAE
on aggregate due to the small size of the hydrocarbon industry.
Sharjah also benefits from relatively high incomes in global terms,
broadly in line with the median of A3-rated sovereigns although
substantially lower than in neighbouring Abu Dhabi (Aa2 stable) and Dubai.
Sharjah's membership in the federal structure of the UAE also provides
numerous credit strengths which support the rating at the current level,
including a highly credible currency peg, strong banking sector
oversight and indirect financial support via spending on infrastructure
and social projects.
Sharjah's event risk is moderate, the same level as Abu Dhabi
(Aa2 stable) and the UAE. The UAE is moderately exposed to geopolitical
event risk, which primarily arises from tensions between Iran and
members of the Gulf Cooperation Council. Risks include a potential
disruption of international shipping through the Strait of Hormuz,
which for Sharjah would result in lower customs revenues. The exposure
to regional geopolitical event risk is also reflected in UAE's military
engagement in Yemen and the current dispute with Qatar (Aa3 stable).
Event risks stemming from Sharjah's government liquidity risks or
the UAE's balance of payments are limited in Moody's view given
the UAE's sizable foreign assets. Notwithstanding the increase
in recent years and potential further rise, the moderate level of
Sharjah's government debt, and the liquid banking sector,
which acts as the government's primary creditor support Moody's
view of low government liquidity risks.
WHAT COULD CHANGE THE RATING UP/DOWN:
Given the negative outlook, an upgrade is unlikely in the foreseeable
future.
The introduction of fiscal consolidation measures sufficient to arrest
the upwards debt trajectory would likely support a stabilization of the
outlook, particularly if combined with a track record of decreasing
volatility in government revenues.
Moody's would likely downgrade the rating if in the absence of a
change in fiscal stance, government debt continued to rise faster
than government revenues, pointing to weaker fiscal strength and
less effective fiscal policy than Moody's currently assumes.
GDP per capita (PPP basis, US$): 32,310.6
(2018 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.6% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.5%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -4%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: [not available]
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 15 July 2019, 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 fiscal or financial strength,
including its debt profile, has materially decreased. Other
views raised included: The issuer's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's governance and/or management, have
not materially changed. The systemic risk in which the issuer operates
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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, +971
(423) 795-06.
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.
Jaime Reusche
VP - Senior Credit Officer
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
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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
