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Rating Action:

Moody's changes outlook on Abu Dhabi's Aa2 rating to stable from negative; affirms ratings

25 May 2017

Singapore, May 25, 2017 -- Moody's Investors Service has today changed the rating outlook on the Government of Abu Dhabi to stable from negative. Concurrently the long and short-term issuer ratings have been affirmed at Aa2/P-1.

The key drivers of the outlook change to stable are (1) an effective and broad policy response to the lower oil price environment via an acceleration in the reform agenda; (2) the economy's growth prospects, supported by a healthy banking system and (3) an easing of contingent liability risk.

As part of today's rating action, Moody's has also affirmed the senior unsecured bond rating at Aa2 and the long-term and short-term MTN programme ratings at (P)Aa2 and (P)P-1, respectively.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE OUTLOOK TO STABLE

--FIRST DRIVER: EFFECTIVE AND BROAD POLICY RESPONSE TO A LOW OIL PRICE ENVIRONMENT

The weaker oil price and its impact on government finances and the economy has prompted a substantial acceleration in reforms containing fiscal pressures and supportive of the emirate's diversification strategy.

The authorities have enacted broad subsidy reforms and expenditure cuts. Fuel, electricity and water prices were increased more rapidly and effectively than in other Gulf Cooperation Council (GCC) countries. Together with these reforms, reductions in capital expenditures and transfers allowed Abu Dhabi's government spending to shrink by 23% over two years.

Further progress has also been made in diversifying revenue. Moody's believes that the UAE is better prepared than its GCC neighbors to implement a new value-added tax in 2018. In addition, a new municipal fee on rental contracts of the expatriate population has been levied, and the authorities are reportedly considering the introduction of a corporate income tax.

During the up-phase of the commodity cycle, the Abu Dhabi government had already taken active measures to reduce the economy's sensitivity to oil price shocks by sponsoring major infrastructure projects, fostering a conducive business environment and distributing resources to government-related entities to invest at home and abroad.

As a result of the reform programme and stabilizing oil prices, Moody's expects Abu Dhabi's fiscal deficit to come down to 2.0% of GDP in 2017 and 0.3% of GDP in 2018, after our estimates of the oil company (ADNOC)'s dividend to the Abu Dhabi Investment Authority (ADIA) and ADIA's investment income are taken into account. The emirate government's debt burden is likely to reflect these declining deficits and stabilize at very low levels, below 8% of GDP by 2018, assuming no contingent liability risk materializes. The rating agency considers that the emirate's fiscal buffers have not been materially impacted by the recent deficits and, with sovereign-wealth fund assets estimated at more than 200% of GDP, those buffers continue to provide ample shock absorption capacity.

In Moody's view, the move by the emirate to multi-year fiscal plans marks a significant institutional improvement because it reinforces the predictability of fiscal policy, with the authorities currently targeting a balanced budget by 2022 based on their definition which excludes sovereign-wealth fund transactions. In addition, a new risk management strategy ensures that the emirate contains liquidity risks related to the public debt's maturity structure, whilst increased cooperation between the department of finance, sovereign wealth funds and the UAE central bank ensures that ample liquidity covers the government's financing needs.

--SECOND DRIVER: ENHANCED GROWTH PROSPECTS

Moody's expects Abu Dhabi's non-oil real GDP growth to slow to 1.9% in 2017, from 8.6% in 2014, reflecting lower government spending, a decline in real estate investment, and a drop in goods exports that was partially offset by higher re-exports and tourism activity. While sentiment has improved with firmer oil prices, one reason for weaker 2017 growth is our expectation that crude oil output will decline slightly due to production cuts decided during the recent OPEC agreement. However, Moody's estimates that real GDP growth will eventually pick up from 1.5% in 2017 to 2.2% in 2018, bolstered by a rebound in hydrocarbon activity, but also improvements in the government's fiscal position that will support an acceleration in government spending as well as improved liquidity in the domestic banking system that will reinforce credit growth.

Although non-performing loans have increased to an estimated 5.0% of gross loans, the banking sector is well positioned to weather asset quality pressures. With a capital adequacy ratio of 18.9%, the banking system is well positioned to support the economic recovery through credit expansion as liquidity conditions are improving. By global standards, the system's loan-to-deposit ratio is manageable at around 96%, providing head room for an expansion of its loan book to a corporate and household sector whose balance sheets have remained healthy overall despite the impact of the oil price shock on the economy and government spending.

--THIRD DRIVER: CONTAINMENT OF CONTINGENT LIABILITIES

Contingent liabilities are being contained with the gradual rise in oil prices and growth. There has also been a stabilization in the debt structure and standalone credit profile of key government related entities in Abu Dhabi, although some have experienced profitability pressures. Moody's has observed a 55% reduction in non-financial public sector debt since 2010, whilst mergers of some government-related entities are likely to buttress their credit profiles. Rated government-related entities continue to have a healthy liquidity profile and have not required direct financial contributions. Debt issued by non-financial enterprises owned by the government of Abu Dhabi were estimated at 24.0% of GDP as of June 2016.

RATIONALE FOR AFFIRMING THE Aa2 RATING

Moody's expects that the Abu Dhabi government's sizeable fiscal buffers, its reform programme and its low fiscal breakeven oil price (estimated at $54 per barrel) will provide the emirate with the flexibility needed to manage its economic and financial challenges, with its key credit attributes expected to remain supportive of its Aa2 rating.

Moody's expects that Abu Dhabi's fiscal reserves will remain well above 200% of GDP over the next few years, under our oil price corridor assumption of between $40 to $60 per barrel through 2018. The diversification of Abu Dhabi's offshore investments offers resilience to low oil prices and a growing source of non-oil revenue.

Concurrently, the government's debt-to-GDP ratio is low at around 4% of GDP as of year-end 2016, and is not expected to materially increase, as the government finances most of its deficit through transfers from sovereign-wealth funds. Moreover, the addition of new revenue and larger than expected expenditure cuts, along with some recovery in oil prices, will contribute to reducing the deficit. Moody's also notes that the Abu Dhabi government demonstrated market access by issuing a $5 billion bond in April 2016, with large demand supporting the Abu Dhabi government's debt affordability.

Abu Dhabi's institutional strength is supportive of its rating. Although it continues to lag that of Aa-rated sovereign peers in other regions, the UAE's scores in the Worldwide Governance Indicators are higher than for other GCC countries, and the timeliness and scope of Abu Dhabi's policy response to the oil price shock is illustrative of the emirate's institutional capacity. At the same time our assessment of institutional strength is constrained by the limited scope and frequency of Abu Dhabi's official economic data, the absence of public figures on budget outturn and on the size and composition of offshore assets. Nonetheless, Moody's expects that progress in data transparency is forthcoming.

Abu Dhabi's susceptibility to event risk continues to constrain the rating and is primarily driven by geopolitical factors affecting the region. At the same time, susceptibility to shocks from the banking system, government or external liquidity is limited in our view.

WHAT COULD MOVE THE RATING UP/DOWN

The stable outlook signals that upward and downward rating pressures are broadly balanced.

The following factors and developments would be credit positive: (1) further progress in economic and fiscal diversification; (2) improvements in the predictability and transparency of fiscal policies at the emirate and UAE level; and (3) a material appeasement in regional geopolitical tensions.

Conversely, the following factors and developments would be credit negative: (1) a prolonged period of oil prices well below our expectations; (2) the crystallization of large contingent liabilities; (3) a material reduction in government financial assets; and, (4) a deterioration in the domestic or regional political environment that threatened to disrupt international trade.

GDP per capita (PPP basis, US$): 130,650 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.8% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.7% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -5.2% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: [not available]

External debt/GDP: [not available]

Level of economic development: Very High level of economic resilience

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

On 23 May 2017, a rating committee was called to discuss the rating of the 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 institutional strength/ framework, 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 this rating is Mathias Angonin, 00 971 4 237 9548.

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.

Christian de Guzman
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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 Singapore Pte. Ltd.
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