By: S&P Global Ratings
The stable outlook on Abu Dhabi reflects our expectation that the country's fiscal position will remain strong over the next two years, although structural 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 assets and external data, alongside further progress in institutional reforms. Furthermore, measures to improve the effectiveness of monetary policy in Abu Dhabi, such as developing domestic capital markets, could also be positive for the ratings over time.
We could consider a negative rating action if we expected a material deterioration in Abu Dhabi's currently strong fiscal balance sheet and net external asset position. If fiscal deficits or the materialization of contingent liabilities led liquid assets to drop below 100% of GDP, pressure on the ratings would develop. A negative rating action could also follow domestic or regional events that compromised political and economic stability in Abu Dhabi.
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 on economic growth, government revenue, and the external account, as well as increasing geopolitical uncertainty in the Gulf region.
The ratings are constrained by our assessment that the emirate's political institutions are at a nascent stage of development compared with those of nonregional peers in the same rating category. 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; and 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 oil. Abu Dhabi currently derives 50% of its real GDP and more than 90% of central government revenue from the hydrocarbon sector, including oil taxes and royalties, plus dividends from state-owned oil producer, refiner, and distributor Abu Dhabi National Oil Co. (ADNOC). We revised our oil price forecasts in April 2019, and we now assume an average Brent oil price of $60 per barrel (/bbl) for the rest of 2019 and 2020, and $55/bbl in 2021 and beyond.
We expect a continuation in the government's policy to pursue economic and revenue diversification and engage the private sector, but we believe the hydrocarbon sector will continue to dominate. Abu Dhabi maintains one of the highest levels of GDP per capita in the world, and the emirate's very strong net government asset position, mostly in foreign currency, makes its economy resilient to shocks in the commodity market. We estimate Abu Dhabi's GDP per capita at $87,000 in 2019. The average change in real GDP per capita weighted over 10 years, however, is only 0.3%, primarily due to historical population growth from high numbers of migrants. We note that population has contracted by more than 4% over the last two years, owing to the restructuring and consolidation of several government-related entities (GREs) and the overall slowdown in the economy, but we expect it will increase again as the economic cycle improves. In our view, wealth levels in the economy could substantially cushion potential risks.
We estimate real GDP growth will reach 2% in 2019, supported mainly by higher oil production. Oil production increased in the first five months of 2019 relative to the full-year 2018 average production. The increase, despite continued production limits set by the "OPEC plus Russia" agreement, reflects reduced over compliance on its production cut targets. In 2018, Abu Dhabi's real GDP grew by 1.9%, mainly as a result of higher oil production in the second half of the year. At the same time, non-oil sector growth continued to slow, given lower government spending over the past four years, introduction of a value-added tax (VAT), weaker private-sector credit growth, and a slowdown in the real estate market. We project that growth will rise to 3.0% by 2022, helped by investment in the oil and non-oil sectors, and recovering domestic credit growth bolstered by improving demand in the region. We assume that ADNOC will gradually increase production, in line with its target to increase capacity to 4 million barrels per day (bpd) by 2020 and 5 million bpd by 2030, from 3.1 million bpd currently. We understand that ADNOC has a five-year investment plan of AED485 billion (approximately 10% of GDP annually) in upstream, midstream, and downstream segments. Of this, AED165 billion will be targeted for downstream operations, including the expansion of the Ruwais complex with a third refinery, which will expand capacity by 600,000 bpd to reach 1.5 million bpd by 2025.
Following several years of expenditure rationalization, we expect the government will moderately increase spending to support a revival in growth. In early June 2018, the Abu Dhabi government announced a stimulus package of AED50 billion over the next three years (approximately 1.8% of GDP annually) to encourage foreign investment and improve the business operating environment. Recently announced measures include offering UAE permanent residency to a select few expatriates, allowing 100% foreign ownership in certain sectors like real estate and reducing the costs of business licenses. Actual fund disbursements thus far, however, have been slow. Downside risks to our growth projections could arise from a sharp fall in oil prices, tightening monetary conditions, and increased geopolitical uncertainties in the region.
In its energy and foreign policy, Abu Dhabi has tried to limit its exposure to geopolitical risks and secure its oil supply to strategic end users. The government completed the Abu Dhabi Crude Oil Pipeline in 2012, which now has the capacity to deliver about 50% of Abu Dhabi's oil exports directly to the Fujairah terminal on the Indian Ocean, bypassing the Strait of Hormuz.
Still, geopolitical risks surrounding rising tensions with Iran, as well as the ongoing trade blockade on Qatar by the UAE, Saudi Arabia, Bahrain, and other regional countries, remain issues of concern. In recent weeks, tensions between the U.S. and Iran have risen sharply. Nevertheless, we expect limited impact on Abu Dhabi's domestic economy and social stability in the near term. The UAE, including Abu Dhabi, continues to import gas from Qatar's offshore North Field through the Dolphin energy pipeline to generate electricity. We expect these imports will continue, barring a significant escalation of tensions. We also expect Abu Dhabi's considerable fiscal buffers will be sufficient to offset the potential financial impact of increased regional political risks.