The stable outlook reflects our expectation that Abu Dhabi’s fiscal and external net asset positions will remain strong
over the next two years, although structural economic and institutional weaknesses will likely persist.
We could consider raising our ratings on Abu Dhabi if we observed pronounced improvements in data transparency,
including on fiscal and external assets, alongside further progress in institutional reforms. Furthermore, measures to
improve the effectiveness of monetary policy, such as developing domestic capital markets, could be positive for the
ratings over time.
We could consider lowering the ratings if we expect a material deterioration of Abu Dhabi’s currently strong fiscal
balance sheet and net external asset position. If fiscal deficits or contingent liabilities caused liquid assets to drop
below 100% of GDP, pressure on the ratings would develop. We could also lower the ratings following domestic orregional events that compromised political and economic stability in Abu Dhabi.
We assume an average Brent oil price of $30 per barrel (/bbl) in 2020, $50/bbl in 2021, and $55/bbl from 2022. Oil markets have been in a period of severe supply-demand imbalance since the second quarter of 2020. In line with our economic outlook, we anticipate a recovery of GDP and oil demand through the second half of 2020 and into 2021 as the most severe effects of the coronavirus outbreak moderate.
The ratings reflect our view of Abu Dhabi’s strong fiscal and external positions. The exceptional strength of the government’s net asset position provides a buffer to counteract the effect of oil price swings and COVID-19 on economic growth, government revenue, and the external account, as well as the effect of increasing geopolitical uncertainty in the Gulf region and the potential crystallization of contingent liabilities.
The ratings are constrained by our assessment that the emirate’s political institutions are still developing, and decision-making processes remain centralized. Limited monetary policy flexibility (given the dirham’s peg to the U.S. dollar); gaps and delays in the provision of macroeconomic, fiscal, and external data; as well as the underdeveloped local currency domestic bond market, also weigh on the ratings.
Institutional and economic profile: Abu Dhabi’s economy and public finances depend heavily on the
hydrocarbon sector Abu Dhabi currently derives 50% of its real GDP and about 90% of central government revenue from the hydrocarbon sector.
The sharp drop in oil prices, cuts to oil production under the recent OPEC++ agreement (between OPEC, Russia, the U.S. and a host of other countries) and reduced activity due to the COVID-19 pandemic will exert significant pressure on the economy. In early April, OPEC++ agreed to cut oil production by 9.7 million barrels per day (bbl/day). In May, the UAE and Saudi Arabia decided to cut production by a further 100,000 barrels per day from June 2020. We expect Abu Dhabi’s oil production will decline to an average of 2.8 million bbl/day in 2020, from 3.1 million in 2019. Non-oil sectors such as real estate, trade, retail, and hospitality will also be particularly affected.
We estimate a contraction in real GDP of 7.5% and of nominal GDP by 22% in 2020, and a gradual recovery from 2021, with real GDP averaging 2.2% over 2021-2023.
Since 2019, the UAE and Abu Dhabi have introduced structural measures to improve the business environment and encourage foreign investment. To counteract the impact of the COVID-19 pandemic, the Central Bank of the UAE has announced a UAE dirham (AED) 100 billion (about $27 billion) plan to support the banking and corporate sectors.
While this should help ease the pressure on corporate issuers and small and midsize enterprises, we expect banks’ credit losses will increase in 2020-2021, leading to a slump in banking sector profitability. We therefore now see the trends for economic and industry risk in the UAE banking sector as negative rather than stable.
Even before the pandemic began, economic growth had been subdued, averaging 1.3% over 2018-2019, largely as a result of oil production cuts under the previous OPEC agreement. At the same time, non-oil sector activity stalled because of weak regional demand, tight fiscal and monetary policy, and rising geopolitical tensions.
In our view, Abu Dhabi’s wealth levels mitigate the effect of weak trend growth, which we project throughout the forecast horizon, on the sovereign’s creditworthiness. We estimate Abu Dhabi’s GDP per capita at $78,000 in 2020.
Bahrain – Sovereign Credit Rating, B+/Stable/B
Key Rating Factors
Bahrain’s economy will contract by 5% this year but government stimulus measures should provide some support.
- Bahrain’s economy and its budget are sensitive to the price of oil.
- The government has implemented a number of stimulus measures to alleviate the fallout on the economy from the COVID-19 pandemic and lower oil prices.
- Growth will rebound in 2021 as oil prices recover and activity in the region increases.
- S&P Global Ratings expects concerns regarding domestic stability will limit the pace and level of implementation of fiscal reforms.