The very high ratings of the Federal Government of the United Arab Emirates (UAE) are resistant to the steep fall that has been recorded in international oil prices since July 2008, says Moody's Investors Service in its new annual credit report on the country. The long-term foreign and local currency issuer ratings of the Federal Government of the UAE are Aa2 with a stable outlook.
"The core assumption that underpins Moody's Aa2 ratings is that the Federal Government is fully supported by the government of Abu Dhabi, also rated Aa2," says Tristan Cooper, a Moody's Vice-President / Senior Analyst and author of the report. As explained in its press release from 18 December 2008, Moody's believes that Abu Dhabi's public finances are very robust and can withstand the recent drop in international oil prices. The rating agency estimates that Abu Dhabi's fiscal breakeven is at around $30 per barrel.
Even if oil prices were to fall below $30 per barrel, the Abu Dhabi government has recourse to a large stock of offshore financial assets. While the full scale of these assets has not been revealed to Moody's, they are known to be worth more than twice the value of the emirate's projected 2008 GDP or more than $280 billion. This is after accounting for recent sharp declines in global equity markets.
Moody's determination of government bond ratings, as set out in its published methodology, reflects four primary rating factors: Economic Strength, Institutional Strength, Government Financial Strength, and Susceptibility to Event Risk. "Moody's considers the UAE's Economic Strength to be Very High. This judgement is based primarily on the country's high level of GDP per capita (notwithstanding its enhanced volatility), extensive reserves of oil and gas, and large holdings of offshore financial assets," explains Mr. Cooper.
The UAE's Institutional Strength is assessed as High. This reflects the country's relatively strong ranking on indicators of institutional quality and the government's seemingly solid commitment to repaying its debt. "However, Moody's notes that the UAE's institutions are still developing and that their quality continues to lag that of higher rated and even some similarly rated countries," cautions Mr Cooper.
Moody's score for the UAE's government financial strength is Very High. This score is primarily driven by the reasons outlined above, i.e. the relatively low fiscal breakeven oil price and very strong balance sheet of the Abu Dhabi government.
Finally, the UAE's susceptibility to event risk is assessed as Moderate. While Moody's considers the risk of domestic political upheaval to be low given the country's long history of internal stability, the volatile regional political environment is of some concern. Meanwhile, in terms of economic event risk: "The vulnerability of the Federal Government's finances to economic and financial shocks would be felt mainly through its domestic contingent liabilities, which we consider to be extensive. However, they are still rather moderate in relation to the size of the Abu Dhabi government's financial assets, which are ultimately the main pillar of support for the Federal Government's Aa2 rating," concludes Mr. Cooper.
Moody's last rating action on the government of the UAE was taken 18 months ago on 9 July 2007 when the rating agency upgraded the country's ratings to Aa2 from Aa3 with a stable outlook. The ratings have remained unchanged since then.