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New York, March 21, 2023 — Moody’s Investors Service (Moody’s) has today affirmed the Government of Abu Dhabi’s long-term local and foreign currency issuer ratings at Aa2. The outlook remains stable. Moody’s has also affirmed the foreign currency senior unsecured debt rating at Aa2 and the short-term local and foreign currency issuer ratings at P-1.
The rating affirmation is underpinned by Moody’s expectation that Abu Dhabi’s balance sheet will remain very strong and its net creditor position very large for the foreseeable future, which provide significant policy buffers and shock absorption capacity. Balanced against this key credit strength is the emirate’s economic and fiscal reliance on hydrocarbons which expose it to oil price cycles and a potential acceleration in global carbon transition in particular, as well as persistent regional geopolitical tensions, although Abu Dhabi’s hydrocarbon endowment and low cost of production, combined with its balance sheet size and effective institutions, help mitigate these credit challenges.
The stable outlook reflects Moody’s expectation that oil prices will remain supportive and the continued improvement in Abu Dhabi’s net creditor position is resilient to somewhat lower oil prices, even with ongoing oil production cuts dampening real GDP growth. At the same time, any further strengthening of the credit profile driven by increased resilience to carbon transition will in Moody’s view take time, as the impact of economic diversification projects is likely to be felt only in the medium to longer term given the preeminent role of hydrocarbons in the economy. Moreover, the scope for durable strengthening of the credit profile may be limited if not accompanied by enhancements to data and policy transparency and disclosure to levels comparable with higher rated peers.
The United Arab Emirates (UAE) constitution provides that certain governmental responsibilities, notably currency and banking, should be discharged at the federal level. This leads us to conclude that the UAE ceilings are relevant to the country’s issuers regardless of the emirate within which they are based, including Abu Dhabi.
Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL474322 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION
GOVERNMENT BALANCE SHEET WILL REMAIN VERY STRONG FOR THE FORESEEABLE FUTURE, A KEY CREDIT STRENGTH
Abu Dhabi’s government financial assets (GFA) are very substantial as a share of GDP, among the largest across sovereigns Moody’s rates, and the amount of assets have consistently grown through oil price cycles. Moody’s calculation of Abu Dhabi’s GFA includes only the assets of the Abu Dhabi Investment Authority (ADIA), which the rating agency estimates to be around 325% of GDP as of the end of 2022. Moody’s expects these assets to keep growing because continued fiscal surpluses supported by the government’s fiscal prudence, and a well-established mechanism of transfers from ADIA to the budget minimises the risk of unexpectedly large transfers that would draw down its GFA. ADIA’s dividend policy is to pay 1% of its assets under management to the government annually regardless of its financial performance.
Based on Moody’s oil price assumptions of $85 per barrel in 2023 and $83 per barrel in 2024, Abu Dhabi is likely to run sizeable fiscal surpluses of an average of 7.3% of GDP over the two years, compared to a surplus of 10.3% in 2022. This is partly the result of the government’s commitment to maintain spending below AED300 billion (28% of Moody’s 2023 GDP forecast) instead of spending the revenue windfall. The fiscal prudence also implies that government finances including GFA are resilient to somewhat lower oil prices. Even in 2020, when the government ran a deficit of 5.5% of GDP, it did not deviate from its dividend policy, thereby preserving its balance sheet strength.
At the same time, Abu Dhabi’s debt will remain low, supporting its net creditor position. Moody’s forecasts the government’s debt burden to decline to 15% of GDP by the end of 2024 from 20% at the end of 2021 and compared to pre-pandemic levels of 12% at the end of 2019. Moody’s forecasts are based on the assumption that the government will rollover its maturing debt, but not increase its debt while interest rates remain high, even though it has an objective of developing a risk-free benchmark in dollars for local issuers. The government’s target is to increase its debt burden to 25-30% of GDP over the medium term to meet is developmental goal. However, even at such higher levels, Moody’s expects Abu Dhabi’s GFA and net creditor position to be extraordinarily strong and continue to anchor its fiscal strength.
Besides fiscal strength, Abu Dhabi’s balance sheet anchors the government’s credit profile by keeping government liquidity and external vulnerability risk very low. The strong balance sheet also offers policy options to effectively address long-term social challenges, maintain high standards of living through investment in public infrastructure and services, and if necessary, implement countercyclical spending to counter shocks, including through the government’s holding companies.
LONGER-TERM CHALLENGES FROM CARBON TRANSITION, GEOPOLITICS AND GOVERNMENT-LED ECONOMIC MODEL REMAIN
Balanced against the strengths conferred by the large GFA is Abu Dhabi’s economic and fiscal reliance on hydrocarbons, which expose it to oil price cycles and a potential acceleration in global carbon transition one of its key credit challenges. Hydrocarbon-related revenue including Moody’s estimates of dividends from the Abu Dhabi National Oil Company (ADNOC) contribute to around 75-80% of total revenue, while the hydrocarbon sector directly contributes to 40-50% of total GDP. These shares are among the highest across sovereigns Moody’s rates.
Besides the direct contribution of the hydrocarbon sector, the broader economy is also exposed to oil price developments because of the size of government spending (27% of GDP in 2022) and the role of government-related entities and other affiliated companies in promoting economic development and diversification, and the global expansion of local companies.
Meanwhile, persistent regional geopolitical tensions remains a latent tail risk, notwithstanding efforts by the UAE and some other Gulf Cooperation Council (GCC) countries to improve relations with neighbours in the region. Any escalation of tensions into military conflict can affect the production and export of oil, and increase perceptions of risk and instability in the region with the potential to weaken long-term economic diversification prospects.
That said, Abu Dhabi’s institutions have demonstrated their credibility and effectiveness over time, which provides confidence in their ability to address these longer-term challenges and absorb shocks. Evidence of the authorities’ ability to adjust include the introduction of non-hydrocarbon sources of revenue (agreed and implemented at the federal level), rationalisation of expenditure to ensure fiscal prudence over the medium term, effective utilitisation of holding companies to implement the diversification agenda, and investments in physical and digital infrastructure and the establishment of Abu Dhabi Global Markets that raise competitiveness, including by promoting trust in the legal and judicial framework.
At the same time, Abu Dhabi’s very low cost of production and very substantial hydrocarbon endowment means that the emirate is likely to be among the last producers standing even in an accelerated carbon transition scenario, and gives the emirate a longer window than many other hydrocarbon producers to implement its diversification plans.
RATIONALE FOR THE STABLE OUTLOOK
Moody’s expects non-hydrocarbon economic activity and the continued balance sheet strengthening to be resilient to somewhat lower oil prices. This is in part because of the role of the government holding companies and other affiliated companies in driving economic activity and implementing projects, while the government maintains its fiscal discipline and avoids drawing down from its GFA. Moody’s forecasts Abu Dhabi’s real GDP growth to be relatively subdued in 2023, moderating to around 1% compared to around 8% in 2022, mainly due to lower oil production as agreed with the Organisation of the Petroleum Exporting Countries and its partners (together OPEC+). However, non-hydrocarbon economic growth is likely to be maintained around 3.5% in 2023.
Notwithstanding this resilience of the credit profile to downside risks associated with oil price volatility, any further strengthening of the government’s credit profile will take time. In particular, Moody’s expects the hydrocarbon sector to remain the primary driver of incomes and wealth for the foreseeable future, despite the progress in and prospects for diversification given Abu Dhabi’s relatively developed physical and digital infrastructure. This is because implementation of projects, such as the development of the healthcare, education, science and research, defence technology and cultural tourism sectors, take time with tangible effects likely to be visible only over many years. Abu Dhabi is also investing in the expansion of oil production capacity to 5 million barrels per day (mbpd) by 2027 from just above 4 mbpd currently, which will increase the size and contribution of the hydrocarbon sector in the medium term. Moreover, given Abu Dhabi’s already high rating level, developments commensurate with a higher rating are likely to be more substantial.
Meanwhile, a durable strengthening of Abu Dhabi’s credit profile will be unlikely without an improvement in policy and data transparency and disclosure standards to levels comparable with higher rated peers, especially in government finance. The government is making attempts to improve macroeconomic data collection and dissemination through the Statistics Centre of Abu Dhabi, but Moody’s does not expect some key categories of government financial data to become available, while the timeliness and frequency of publication continues to lag peers.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Abu Dhabi’s ESG Credit Impact Score is moderately negative (CIS-3), primarily reflecting its highly negative exposure to environmental risks. Strong institutions and governance support the government’s capacity to respond to the environmental challenges, while social risks are low.
Abu Dhabi’s exposure to environmental risk is highly negative (E-4 issuer profile score) and driven by its significant economic and financial dependence on the hydrocarbon sector, although low production costs provide a degree of insulation to the global transition away from hydrocarbon fuels over the longer term. As climate change intensifies, Abu Dhabi is also highly vulnerable to rising sea levels in the future given the topography of its coastal capital, where the majority of the emirate’s population live. Meanwhile, Abu Dhabi is also susceptible to water management risks as the UAE is one of the world’s ten most arid states, although the use of desalination plants reduces water supply challenges.
The exposure to social risk is neutral-to-low (S-2 issuer profile score). Given the UAE’s young population that will drive rapid growth in the labour force over the coming decades, the effectiveness of labour market policies in keeping unemployment low among citizens will be a key determinant of social pressures and risks, including in Abu Dhabi. That said, the very low proportion of citizens relative to the labour force and overall population mitigates this challenge.
The influence of governance is positive (G-1 issuer profile score) in Abu Dhabi. This reflects the credibility and effectiveness of institutions and policies, as demonstrated by the reform-driven improvements in the business environment and progress in developing the emirate’s non-hydrocarbon sectors. However, there is limited institutional and data transparency, including on government finances, the size and composition of government financial assets, and the financial performance and debt levels of government-related entities.
GDP per capita (PPP basis, US$): 142,401 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 3.4% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.1% (2021)
Gen. Gov. Financial Balance/GDP: 6.4% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: [not available] (also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: a1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 16 March 2023, a rating committee was called to discuss the rating of the Abu Dhabi, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be upgraded if Moody’s assesses Abu Dhabi’s resilience to carbon transition scenarios to have materially increased, particularly through greater diversification of economic activity and drivers of income and wealth away from hydrocarbons. Greater transparency in fiscal policy and material improvements in data disclosure practices, as well as a durable decline in geopolitical risk, would also lead to a more positive assessment of Abu Dhabi’s creditworthiness.
Downward pressure on the rating could develop if a prolonged period of oil prices well below Moody’s current assumptions results in a material weakening of the government’s fiscal strength and credit profile. An escalation in regional political tensions that significantly affects Abu Dhabi’s ability to produce and export oil for an extended period or hinders the development of nonhydrocarbon sectors, or a sharp increase in contingent liabilities that weakens confidence in the public balance sheet, would also lead to a more negative assessment of the emirate’s creditworthiness.
The principal methodology used in these ratings was Sovereigns published in November 2022 and available at https://ratings.moodys.com/api/rmc-documents/395819. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The local market analyst for this rating is Christian Fang, +971 (423) 795-34.
REGULATORY DISCLOSURES
The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL474322 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody’s disclosures on the following items:
EU Endorsement Status
UK Endorsement Status
Rating Solicitation
Issuer Participation
Participation: Access to Management
Participation: Access to Internal Documents
Lead Analyst
Releasing Office
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
David Rogovic
VP – Senior Credit Officer
Sovereign Risk Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Matt Robinson
Associate Managing Director
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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