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.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
