UAE Gets First Rating From Fitch Ahead of Federal Bond Sale

(Bloomberg) -- The United Arab Emirates was assigned the fourth-highest investment grade at Fitch Ratings as the Gulf nation prepares to issue a federal bond for the first time.

The company ranked the sovereign AA- with a stable outlook. It cited moderate consolidated public debt levels, a solid external asset position, and the likelihood of support from the nation’s capital Abu Dhabi if needed. Moody’s Investors Service rates the UAE at Aa2, its third-highest investment grade.

“The UAE’s fiscal and external balance sheets benefit from Abu Dhabi’s large sovereign net foreign assets,” the agency said on Wednesday. “However, although Abu Dhabi is committed to the financial stability and health of the UAE, it demonstrated in 2009-10 that support is selective.”

​Abu Dhabi is rated one level above the UAE at Fitch, which now sees the federation’s budget shortfall widening to 3.8% of gross domestic product in 2020 from a surplus of 3.8% in 2019.

“This whole exercise is driven much less by some urgent financing need and need to finance a deficit,” Jan Friederich, a Hong Kong-based senior director for sovereign ratings at Fitch, said in an interview on Bloomberg TV on Thursday. “Instead, it is much more about developing a yield curve that allows government-related entities and the private sector to issue easily in domestic markets.”

The UAE has never raised a federal bond, as issuances often happen at an emirate level, and Fitch’s Friederich said he did not have an indication of when the country might tap the market.

Both Dubai and Abu Dhabi have sold bonds this year as countries in the region grapple with budget deficits amid a collapse in oil prices. Neighboring Saudi Arabia raised more than $21 billion while Qatar opted for a $10 billion issuance, according to Bloomberg data.

“The UAE as a whole is in fact quite leveraged in several respects, in the sense that some emirates have accumulated quite a bit of debt,” Friederich said. Debt in the UAE is predicted to rise over the next two years, mostly in Abu Dhabi and to a lower extent in Dubai, partly because of the capital’s preference for debt over asset drawdowns.

More from Fitch:

• Government debt is seen at 34% of GDP in 2020, rising to about 45% of GDP by 2022, driven by individual emirates’ deficits and the federal government debt issuances
• The banking system’s assets are seen at around 250% of 2020’s forecast economic output
• Introduction of value-added tax in 2018 bolstered revenue “but was partly offset by lower grants by Abu Dhabi”
• Contingent liabilities from government-related entities are seen at around 80% of this year’s GDP
• Economic growth is set to shrink 6.8% this year with a 6.4% contraction in non-oil GDP, it will recover next year to 1.7% because of OPEC+ production curbs
• Geopolitical risks “are elevated” as tensions between neighboring Saudi Arabia, Iran and the U.S. along with the UAE’s involvement in the Yemen war, and the Qatar boycott pose a risk to the region

©2020 Bloomberg L.P.