Fitch affirms Abu Dhabi at 'AA'; outlook stable

The Long-term local currency IDR is also affirmed at 'AA', with a Stable Outlook and the Short-term foreign currency IDR at 'F1+'. The UAE Country Ceiling, which applies to Abu Dhabi, is affirmed at 'AA+'.

"Abu Dhabi's strong balance sheet enables it to weather most conceivable shocks," says Charles Seville, Associate Director in the Sovereign group at Fitch.

Over the past 12 months, the emirate has seen a fall in oil prices and a sharp drop in global equity prices, which has affected returns at its sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA). Both shocks have been partially retraced over the past six months.

Investment losses at ADIA during 2008 were, Fitch estimates, in line with diversified global funds such as the California State Employees Retirement System (Calpers) and Norway's Government Pension Fund, which lost around 20%. Losses outweighed new investment inflows during a year of rising oil prices. Fitch estimates that external assets will have recovered some ground in 2009. The government has confirmed to Fitch that its assets were still worth at least 200% of GDP in 2008, making Abu Dhabi's sovereign net foreign asset position one of the strongest of any rated country. It is stronger than that of Saudi Arabia ('AA-'/Outlook Stable) and comparable to Kuwait's ('AA'/Outlook Stable).

Oil income will fall in 2009 on lower average oil prices. At Fitch's assumption of $55/b for Brent in 2009, the general government (central government plus estimated investment income) will be close to breaking even, while the dividend of ADNOC, the national oil company, will continue to be paid direct to ADIA, adding to government non-reserve external assets.

External liabilities are on the increase. The sovereign has only $4bn of direct external debt outstanding (having issued $3bn in eurobonds in April 2009 and $1bn in August 2007), but contingent liabilities have grown. State-owned companies are borrowing to support acquisitions and the strategic development plans of Abu Dhabi. With a variety of quasi-sovereign entities borrowing, the risk grows that one may eventually have to call upon the sovereign to help it service debts. Wholly or partly state-owned companies (excluding banks) have borrowed in excess of $18bn on external bond and loan markets so far in 2009, some of it refinancing. Fully state-owned enterprises owe $20.1bn as of June 2009 according to official sources. Total external debt of Abu Dhabi, not including banks, is estimated at $56bn (40% of GDP) in 2008, below Kuwait's and the 'AA' median but above Saudi Arabia's.

Federal government debts, which were equivalent to 17% of UAE GDP at the end of 2008, are also regarded as contingent liabilities on Abu Dhabi, given the close relationship between the two. The federal government derives the largest part of its funding from Abu Dhabi.

The debts of other emirates fall into the category of potential contingent liabilities. The large refinancing needs of government-related entities in Dubai have brought the issue of inter-emirate support centre stage. Abu Dhabi is under no obligation to prevent other emirates from defaulting on their debts, and Fitch regards a direct bilateral transfer as unlikely. Support for Dubai has so far come via the Central Bank of the UAE (CBUAE). In March, the CBUAE bought a $10bn Dubai government bond, reportedly using international reserves. The funding of a further $10bn remains unclear.

Transparency is lower than in the majority of 'AA'-rated sovereigns. Fitch has been given official guidance over the assets and liabilities of Abu Dhabi but does not have a complete picture. The mechanism for support of other emirates and the federal government is also not fully transparent. Checks and balances on executive power are less developed than in most of the peer group.