Fitch affirms Abu Dhabi at 'AA'; outlook stable

The Short-term foreign currency IDR is affirmed at 'F1+'.

A Country Ceiling of 'AA+' is assigned to the UAE, applying to Abu Dhabi and all other emirates within the UAE.

"In the context of high oil prices, Abu Dhabi's financial wealth is increasing at a rapid rate as the government uses huge fiscal surpluses to accumulate external assets," said Charles Seville, Associate Director in Fitch's Sovereign team.

Per capita income of $71,196 in 2007 is one of the highest among rated sovereigns.

Abu Dhabi government non-reserve assets managed by the Abu Dhabi Investment Authority (ADIA), the principal sovereign wealth fund, were worth at least twice the country's GDP in 2007, according to official guidance.

Fitch projects that, despite depressed global stock markets, government non-reserve assets will continue to grow and maintain a similar ratio to GDP through to end-2008.

Abu Dhabi's net public sector external creditor position is estimated to be substantial as a percentage of GDP - one of the strongest among Fitch-rated sovereigns, comparable with Kuwait ('AA-' (AA minus)/Outlook Stable) and Saudi Arabia ('AA-' (AA minus)/Outlook Stable) and stronger than that of Asian net external creditors such as Singapore, Taiwan and China.

Its overall net external creditor position is likewise comfortable, and takes no account of private sector external assets, data for which is unavailable.

Gross external debt is increasing, related mostly to the financial system and to majority state-owned enterprises, but remains small in relation to assets.

There are no officially available external debt figures.

Fitch estimates gross external debt at around $60bn, or 55% of GDP.

Public sector external debt is estimated at 17% of GDP.

More transparency on both assets and liabilities would be positive for the ratings.

A strong external balance sheet mitigates Abu Dhabi's main vulnerability, namely the risk of a steep fall in the price of oil.

Oil represents over 90% of exports and central government revenues.

Nevertheless, the government budgets cautiously and with spending at 2008 levels, the fiscal balance including estimated investment income would stay in surplus at average oil prices as low as $30 per barrel, with no adjustment in outlays.

The true breakeven oil price, taking account of the dividend ADIA receives from the state-owned Abu Dhabi National Oil Company (ADNOC) is lower still.

Abu Dhabi is a major oil exporter and has credible investment plans to maintain and increase oil export capacity.

Efforts to reform the state, reduce the size of the public administration, and diversify the economy, are positive for the ratings.

The government has outlined a development strategy and is encouraging private sector investment to create opportunities for its citizens.

For the moment public sector firms continue to play a leading role, and the government could be exposed to contingent liabilities from this source.

The financial sector is well-capitalised and asset quality is good, although strong credit growth and an overheating real estate sector could generate problems and result in liabilities for the sovereign - albeit of a lesser magnitude than the resources available to Abu Dhabi.

Abu Dhabi is under no obligation to prevent other emirates from defaulting on their debts, but is likely to provide support selectively, case by case.

Abu Dhabi is politically stable and has been free from terrorism, although the ratings are constrained by geopolitical risk, in common with others in the Gulf.

Checks and balances on executive power are lacking relative to 'AA' peers and this is a potential weakness.

Abu Dhabi has a pre-eminent position in the seven-member United Arab Emirates (UAE), producing most of the UAE's oil and gas and accounting for more than half of the federation's economic output.

Individual emirates control their natural resources and revenue and retain much policy autonomy.

Consequently, although the emirate is a member of the UAE, Fitch treats Abu Dhabi and other emirates as sovereign entities.