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New York, March 21, 2023 — Moody’s Investors Service (Moody’s) has today affirmed the Aa2 long-term local and foreign currency issuer ratings of the Government of the United Arab Emirates (UAE). The outlook remains stable. Moody’s has also affirmed the foreign currency senior unsecured debt and programme ratings at Aa2 and (P)Aa2, respectively.
The rating affirmation is underpinned by Moody’s assessment that the UAE federal government’s debt level will remain very low, supported by its continued adherence to balanced budget targets and limited spending needs due to the scale of fiscal decentralisation within the country. Although the country is exposed to longer-term carbon transition risks and persistent regional geopolitical tensions, solid institutions and policymaking that contribute to the significant progress in economic diversification away from hydrocarbons help contain these challenges.
The stable outlook reflects Moody’s expectation that continued efforts by the governments across the UAE to expand non-hydrocarbon revenue, promote the development of non-hydrocarbon sectors and attract foreign businesses and talent may reduce the federal government’s indirect exposure to oil price cycles and a potential acceleration in global carbon transition over the medium term, further strengthening its credit profile. However, uncertain global geopolitical developments and downside risks to global growth may slow the diversification momentum, while tangible impact of the government’s initiatives and policies are likely to take time to materialise. 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 UAE’s local and foreign currency country ceilings remain unchanged at Aaa. The two-notch gap between the local currency ceiling and the sovereign rating reflects the country’s effective and forward-looking institutions and very strong external accounts position, which takes the ceiling to the maximum level of Aaa. The zero-notch gap between the foreign currency and local currency ceilings reflects extremely low transfer and convertibility risks given the central bank’s ample foreign exchange reserves and Moody’s view that Abu Dhabi’s vast government financial assets invested in foreign currencies could be used to support the exchange rate if needed. The UAE’s 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.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION
FEDERAL DEBT TO REMAIN VERY LOW AMID ADHERENCE TO BALANCED BUDGET TARGETS THAT LIMIT FISCAL RISKS
The federal government targets balanced budgets and has consistently met or modestly exceeded these targets, including through the oil price shock over 2015-17 and during the peak of the coronavirus pandemic in 2020. Moody’s expects the government to continue delivering balanced budgets even as it increases spending from a narrow base. The increase in expenditure is supported by a corresponding increase in revenue, as robust growth in nonhydrocarbon economic activity will contribute to higher collection of value-added tax (VAT, of which the federal government retains some portion and distributes the rest to the individual emirates), while the ongoing inflow of businesses, expatriates and digital nomads will increase the collection of services fees. The introduction of corporate income tax (CIT), effective 1 June 2023, will also raise government revenue from 2025 based on a revenue sharing model that is likely to be similar to the VAT. Meanwhile, the scope for spending is still limited at the federal level, given the significant level of fiscal decentralisation across the federal government and individual emirates, and the substantial spending by Abu Dhabi including for some projects such as the national rail network (Etihad Rail) and on defence and one-off social programmes.
Given the federal government’s fiscal framework, Moody’s expects federal government debt to only grow gradually over the next few years, reaching 4.3% of GDP by the end of 2025 compared to 1.9% of GDP at the end of 2022. The UAE’s federal government debt is among the lowest across sovereigns Moody’s rates. In general, federal debt is accumulated mainly for market development purposes, specifically to develop a local currency yield curve and to provide risk-free assets in local currency, and the government does not issue debt for deficit financing even though 15% of its debt can be used to finance infrastructure spending. All of the local currency debt proceeds are also invested in financial assets by the Ministry of Finance, while proceeds from opportunistic issuances of foreign currency debt are converted into long-term investments by the Emirates Investment Authority (EIA). Federal debt issuance is capped at 250% of the government’s stable revenue base, which translates to an effective cap of around 6-7% of GDP based on Moody’s estimates a very low level.
The budgetary and debt controls, which Moody’s expects strong adherence to, limit the fiscal risks of the federal government and supports its very high fiscal strength. In addition, although the federal government has very limited government financial assets (GFA), Moody’s believes that there will be extraordinary direct or indirect support from Abu Dhabi during episodes of stress or shocks, should the federal government’s balance sheet not have the capacity to provide countercyclical spending or absorb the shock. Moody’s estimates that Abu Dhabi’s GFA amounted to around 325% of GDP as of the end of 2022. The strength of Abu Dhabi’s balance sheet also fosters confidence in the country’s currency peg to the dollar and keeps external risks very low.
PROGRESS IN ECONOMIC DIVERSIFICATION, CREDIBLE INSTITUTIONS CONTAIN LONGER TERM RISKS INCLUDING FROM CARBON TRANSITION AND REGIONAL GEOPOLITICS
The UAE economy and indirectly the federal government are exposed to oil price cycles and a potential acceleration in global carbon transition, a key long-term credit challenge for the government’s credit profile. The federal government’s exposure to hydrocarbons is mainly confined to the contribution of the sector to real GDP and incomes and wealth, as well as hydrocarbon exports sustaining the country’s strong balance of payments position. Although the federal government does not receive revenue that is linked to hydrocarbon production, it has indirect exposure as grants from Abu Dhabi can be considered hydrocarbon-linked.
At the same time, progress in economic diversification in the UAE is also relatively advanced compared to peers in the Gulf Cooperation Council (GCC), as the country is the main services hub in the region for transport and logistics and business and financial services, as well as the main destination where multinational companies establish their regional headquarters. The contribution of the hydrocarbon sector to GDP is around 25%, lower than GCC peers except for Bahrain. The UAE’s economic competitiveness underpins its development and diversification, and is supported by its relatively advanced physical and digital infrastructure, transport and logistics capacity and linkages, the availability of a full suite of services companies that can support businesses under legal and judicial systems that foster confidence and trust (via Abu Dhabi Global Markets and Dubai International Financial Centre), and conducive time zone that can access most global markets during business hours. The UAE’s rapid reopening post-pandemic, recent changes to its visa regime allowing expatriates to obtain longer term visas more easily and attracting remote workers, and changes to the work week from Monday to Friday also enhance its international appeal.
Meanwhile, persistent regional geopolitical tensions remains a latent tail risk, notwithstanding efforts by the UAE and some other 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.
However, the UAE’s institutions have demonstrated their credibility and effectiveness over time, which provides confidence in their ability to address the longer-term challenges and absorb shocks. Notably, the authorities have introduced VAT and are introducing CIT to expand federal government revenue and diversify the country’s overall revenue base away from hydrocarbons, managed the pandemic effectively to allow a swift reopening of international borders, and implemented changes to visa requirements and social rules and laws to take advantage of post-pandemic trends and even global geopolitical shifts.
The UAE’s credit profile is also constrained by policy and data disclosure and transparency practices that lag similarly rated peers, especially in government finance. The Federal Competitiveness and Statistics Centre has made some progress in making data more available and timely, although there are constraints arising from the uneven capacity across the individual emirates to collect and compile data, which slows publication. At the federal level, government financial data is not made available publicly to the same extent as peers, although this is in part a policy decision.
RATIONALE FOR THE STABLE OUTLOOK
On the upside, momentum in development of nonoil sectors could accelerate and strengthen the UAE’s credit profile beyond Moody’s expectations as a result of shifts in work practices and business strategies post-pandemic, and in the current geopolitical climate that is seeing human capital and financial flows gravitating towards the country. This would reduce the country’s exposure to hydrocarbon sector developments beyond what the rating agency currently assumes.
Under Moody’s baseline assumptions, the effects of the post-pandemic inflows are likely to become tangible only in the medium to long term beyond a short term cyclical boost, because the gestation of new investments is likely to take time and the economic impact of some sectors that are being targeted especially in the digital economy may also be hard to quantify. Moreover, some of the boost in economic activity resulting from geopolitical conflicts may be one-off, if investment and spending is targeted at less productive capital, such as the real estate. Moody’s expect the UAE’s real GDP growth to moderate to 4% in 2023, compared to 7.6% in 2022 and 3.9% in 2021, driven by the modest contraction in oil output as agreed with the Organisation of the Petroleum Exporting Countries and its partners. The non-hydrocarbon economy is nevertheless likely to remain bouyant, growing 6% in 2023.
On the downside, global and regional geopolitical developments remain uncertain and risks to global growth remain skewed to the downside with global interest rates still high relative to the past decade. Although Moody’s sees the potential for the UAE to benefit from global geopolitical trends, there is a significant element of unpredictability in these developments that could raise the perceptions of risks in the country. Separately, substantially weaker global growth may disincentivise the global expansion and investment plans of multinational companies, while significantly lower oil prices because of weaker demand may also weaken economic sentiment and lower public and private investment in the region. These developments while not in Moody’s baseline would weigh on the UAE’s medium-term growth prospects.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
The UAE’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 environmental challenges, while social risks are low.
The UAE’s exposure to environmental risk is highly negative (E-4 issuer profile score) and driven by the country’s economic dependence on the hydrocarbon sector, notwithstanding the substantial progress in economic diversification. That said, low production costs provide a degree of insulation to the global transition away from hydrocarbon fuels over the longer term, while the federal government’s financial exposure to hydrocarbons is limited. As climate change intensifies, the UAE is also highly vulnerable to rising sea levels in the future, with up to 10% of the population potentially exposed under a scenario where sea levels rise by one metre. Meanwhile, the country is also susceptible to water management risks as it 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 country’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. That said, the very low proportion of citizens relative to the labour force and overall population, and the UAE’s more diversified non-oil economy offering greater opportunities compared to regional peers, help to mitigate this challenge.
The influence of governance is positive (G-1 issuer profile score) in the UAE. This reflects the credibility and effectiveness of institutions and policies, as demonstrated by the reform-driven improvements in business environment and continued progress in diversifying the economy away from hydrocarbons. However, data disclosure and transparency practices lag peers, including the availability and/or timely dissemination of some macroeconomic and government financial data, 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$): 71,077 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 3.9% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.2% (2021)
Gen. Gov. Financial Balance/GDP: 0.3% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 11.6% (2021) (also known as External Balance)
External debt/GDP: 93.8% (2021)
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 United Arab Emirates, 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
Upward pressure on the rating would develop if regional geopolitical tensions decline significantly and durably, or if the UAE’s resilience to carbon transition scenarios materially increases further. A marked improvement in policy transparency and data disclosure practices at both the federal and emirate levels would also lead to a more positive assessment of the government’s creditworthiness. Additionally, given the importance and size of Abu Dhabi’s economy and balance sheet and strong interlinkages between the federal and Abu Dhabi governments, an upgrade of Abu Dhabi’s rating may exert upward pressure on the UAE’s rating.
Downward pressure on the rating would likely emerge from an escalation in regional political tensions that significantly affects the UAE’s ability to produce and export oil, or develop its nonhydrocarbon sectors. Perceptions that support from Abu Dhabi for the federal government, including for some spending that is the responsibility of the federal government, is declining without a corresponding increase in self-sustaining revenue may also lead to a more negative assessment of the federal government’s creditworthiness. In addition, a downgrade of Abu Dhabi’s rating may exert downward pressure on the UAE’s rating.
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
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.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
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.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
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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