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Abu Dhabi sovereign rating resilient. Dubai’s stable growth not without risks

Fisch Asset Management (“Fisch”), one of the leading credit analysis and convertible bond specialists, has said that growth in the Emirates of Abu Dhabi and Dubai will remain at a sustained level of approximately 3% over the next few years, if oil prices remain stable around current levels.

Growth is predicted to be steady, albeit modest when compared with over 4% per annum achieved pre-2015.

A report by Independent Credit Review (I-CV), a subsidiary of Fisch, confirmed Abu Dhabi’s credit quality as AA-, with the Emirate benefitting from comfortable reserves, but with a forecast of slightly negative national budgets and rising debt levels over the coming years.

Dubai received an upgrade to BBB+, stemming from a gradual reduction in total debt, including contingent obligations from state-owned companies, from 141% at the end of 2013 to 111% at the end of 2016.

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The report infers that the selective introduction of import tariffs and VAT will not negatively impact economic growth in the Emirates, but will instead support the fiscal situation in light of lower oil-related activities.

The report shows that the UAE’s stable economic growth is not without risks and that Abu Dhabi has particularly strong exposure to lower oil prices.

The Emirate has a high dependence on oil production, which accounts for up to 50% of GDP, with efforts towards diversification still at a tentative stage.

Concerns for Dubai include the high debt levels of state-owned enterprises, substantial investment requirements in the build-up to Expo 2020 and the fact that the Emirate’s more diverse economic activity (including trade, tourism and retail) is by no means immune to a slowdown in the GCC region.

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Philipp Good, CEO and Head of Portfolio Management at Fisch Asset Management, commented:

“Both Abu Dhabi and Dubai provide complementary strengths to the UAE economy. Abu Dhabi is prosperous with a high per capita income and a resource-rich economy, including oil reserves sufficient for 65 years at constant production levels. The Emirate’s conservative spending policy is supported by a low break-even oil price of around $62 per barrel. Dubai has an open economy with strengths in tourism, trade and retail, with the city successfully establishing itself as a hub for finance and trade in the UAE and GCC. Its high per capita income is more stable when compared with regional peers. Crucially for Abu Dhabi, despite a sharp correction in the oil price, there has only been a very slow increase in sovereign debt from an already low level. Conversely, Dubai’s debt, despite a steady decline, remains elevated and the Emirate has high investment requirements for Expo 2020.”

The UAE’s debt position is considered by the report to have been gradually defused since the 2008 crisis in Dubai, primarily due to robust GDP growth over the last few years. However, debt among state-owned companies is considered to be a risk factor. A high proportion of around 80% foreign workers in both Dubai and Abu Dhabi support the smooth functioning of the economy in the oil and gas sector as well as in tourism and retail – which are heavily dependent on imports. These factors are outlined as reasons for the UAE being particularly susceptible to interruption of trade routes, or any destabilisation of the GCC’s geopolitical environment.

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Philipp Good concluded:

“The United Arab Emirates is seeing a new period of slow and steady economic growth, supported by twin boosters of oil-producing giant Abu Dhabi partnered with Dubai benefiting from many years of efforts towards diversification. The UAE should certainly prepare against risks, however – for example, Dubai’s tourism and construction industry is strongly dependent on geopolitical stability, and regional, European and international visitors, meaning it will be exposed to any escalation in diplomatic disputes within the GCC or the knock-on effects of Brexit. For Abu Dhabi there is a high dependence on oil production, equating to around 50% of GDP, with only tentative efforts so far made towards diversification. That said, the Emirate has a considerable financial buffer in the shape of a substantial Sovereign Wealth Fund, worth an estimated $824 billion. Dubai has benefitted from Abu Dhabi’s direct support, such as refinancing of $20 billion on good terms, which helped to mitigate the fallout from the 2008 real estate crash. These are just a couple of rating factors, based on which I-CV confirmed a positive credit rating of AA- for Abu Dhabi and raised Dubai’s to BBB+.”