Dagong Upgrades the Sovereign Credit Ratings of the UAE to A and A- with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
July 3, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to upgrade the local and foreign currency sovereign credit ratings of the United Arab Emirates (hereafter referred to as “the UAE”) from A- and BBB+ to A and A-, each with a stable outlook. Aided by rising oil prices among other contributing factors, the UAE’s oil industry has got rid of its slump. The country’s economic diversification strategy accelerates economic growth, while given recent adjustments to the tax system, fiscal consolidation is likely to continue the positive trend, and the UAE’s debt burden keeps on falling. Hence, government solvency in local and foreign currency is bolstered.
The key reasons for upgrading the sovereign credit ratings of the UAE are below:
First, geopolitical risks remain, although the domestic political situation is stable. The economic and trade environment in the region is beset by geopolitical turmoil in the Middle East, including Syria’s chemical weapons attack, and the U.S. withdrawal from Iran nuclear deal, among other incidents. However, the UAE’s diversified economic development can proceed steadily for a long term, guaranteed by political stability at home, the country’s safety alliance with the U.S., as well as close trade exchanges with Iran, among other factors.
Second, the credit environment is extremely sound, with overall risks generally manageable. The UAE’s central bank progressively raises its own rates following the U.S. Federal Reserve’s rate increases, bringing about tightened liquidity. An imbalance between supply and demand leads house prices in Abu Dhabi and Dubai to fall consistently over the past three years. Though banks’ non-performing loan ratio has risen a little to 6.7%, the asset quality risks facing banks in the UAE are manageable, thanks to improved financial regulation, sufficient banking assets, the NPL Provision coverage being as high as 107.1%, as well as high-quality liquid assets.
Third, rising oil prices bolster faster economic growth while the country’s diversification strategy results in greater growth potential in the medium and long term. Exports in the oil sector, public investment into non-oil sectors, and services exports will all be boosted by the anticipated global oil price rises and the Dubai World Exposition. Hence, it is expected that in 2018 and 2019, the UAE’s growth rate will rise to 2.5% and 2.8%. In the medium and long term, the country’s economic diversification strategy can somewhat redress the regional and structural imbalances facing domestic economic development, all the while improving vulnerabilities inherent in the export-oriented growth model, and enhancing economic resilience in response to risks. It is projected that in the following five years, the UAE’s growth will average 3.0%.
Fourth, the fiscal deficit narrows, thus repayment sources are more secure. In the short term, thanks to the pickups in international oil prices and the government’s imposition of excise tax and value-added tax, among other new taxes, fiscal consolidation can sustain its momentum. It is forecasted that in 2018 and 2019, the UAE general government’ fiscal deficit will fall to 1.4% and 0.8%, while financing needs over the same period amount to 31.1% and 13.7% of fiscal revenues. Standing at around 344.4% of GDP, the UAE’s Sovereign Wealth Fund can provide a strong cushion for repayment sources, thus government repayment sources are more secure.
Fifth, government solvency is boosted. In the near term, the UAE general government’s debt burden will stand as low as 19% of GDP, amounting to 64.7% in 2018 and 66.1% in 2019 of fiscal revenues, while falling slightly. Considering economic recovery, the government faces eased pressure from the real debt burden. Hence, local-currency solvency is enhanced. In terms of foreign debt, the current account surplus grows, and in 2017 the UAE’s total foreign debt burden dropped by 3.8 percentage points to 58.4% compared with the year before, while international reserves coverage on short-term debt reached 147.3%. That, combined with the UAE’s sound net creditor position and enormous net financial assets, bolsters government solvency in foreign currency.
In the short term, the expectation of rising global oil prices and the preparation of the world exposition will lead to higher growth rates. The rapid growth of fiscal and foreign exchange revenues, as well as the country’s progressive fiscal consolidation policy, help reduce the government debt burden. The remarkable Sovereign Wealth Fund provides strong support for the government to guard against external shocks. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for the UAE for the following one to two years.