Fitch rates Ras Al Khaimah 'A'; outlook stable

The outlooks for both ratings are stable. Fitch has also assigned RAK a Short-term foreign currency IDR of 'F1'.

"Ras Al Khaimah's rating is supported by its relatively diverse economy, rapid economic development and high per capita income and the government's prudent fiscal policy and strong balance sheet,"

says Richard Fox, Head of Middle East and Africa Sovereign Ratings at Fitch.

On average the budget has been balanced since 2002 and debt has only recently begun to grow as infrastructure spending has accelerated. As one of the seven emirates making up the United Arab Emirates, RAK also benefits from the institutions and resources of the federation, although it retains considerable autonomy, especially in the areas of economic development and budgetary policy.

The emirate is small, with estimated GDP of only $3.4bn in 2007 - just 2% of total UAE GDP - but is developing rapidly in areas complementary to its larger neighbours. It has few hydrocarbon resources but has comparative advantages in quarrying and the manufacture of construction inputs - in high demand in the region - as well as more high value-added manufacturing such as glass, ceramics and pharmaceuticals. Tourism is becoming more important.

RAK's liberal business model, supported by state-provided infrastructure, has attracted major foreign investment since 2003 in two free zones, which are home to almost 4,000 companies. The public sector includes 13 wholly-owned strategic companies that are involved in quarrying, ports and tourism, among others, which together provide almost half of all budget revenue. The rest comes mainly from land and property sales and free zone licenses and fees. There is no domestic personal or corporate income tax.

The UAE's external position is very strong, with a large current account surplus and strong net external assets. The rating of individual emirates is determined more by their public than their external finances, as in other common currency areas. Public sector debt at end-2006 was just 7% of GDP, well below the 'A' median, with no external debt and limited foreign currency debt.

However, debt rose to 20% of GDP in 2007, largely due to a $325m sukuk issued by the RAK Investment Authority (RAKIA), guaranteed by RAK, of which roughly half was taken up outside the UAE. If plans for a sovereign sukuk go ahead, debt will rise further in 2008 to almost 30% of GDP. However, this will still be below the 'A' median.

Moreover, as spending has not risen as fast as borrowing, deposits have also increased so that net debt is estimated at just 8% of GDP at end-2007 and is forecast to rise to 16% of GDP this year. In addition, RAK's balance sheet benefits from minority stakes in locally listed companies with a market value of around USD1.5bn or over 40% of GDP. This provides significant mitigation to the risks associated with debt-financed infrastructure expansion.

Moreover, even excluding these assets, and with no significant external assets, RAK's public sector balance sheet strength is comparable to the 'A' category median. Future revenues will benefit from the increased economic activity that will be facilitated by enhanced infrastructure, with the budget projected to revert to surplus in 2009. Excluding capital spending, the current fiscal balance will remain in surplus.

RAK is politically stable with the Crown Prince, appointed in 2003, a key driver of the emirate's development programme. Political stability is also cemented by the UAE's federal institutions. However, regional political risk weighs negatively on the rating, as in other emirates. Other weaknesses are limited public disclosure and the availability of financial data. Greater public transparency would strengthen accountability and policy credibility. Institutional constraints on executive power are also relatively weak.