TEXT-S&P affirms Abu Dhabi ratings At 'AA/A-1+';outlook stable

Nov 26 -

Overview

-- In view of its large financial assets and sizable fiscal surpluses, we believe that Abu Dhabi's government has a considerable buffer to support its economy and mitigate the risks from external vulnerabilities.

-- We are therefore affirming our 'AA/A-1+' sovereign credit ratings on Abu Dhabi.

-- The stable outlook balances our view of Abu Dhabi's wealthy economy and policy flexibility against the risks from structural and institutional weaknesses, its high contingent liabilities, and limited monetary policy flexibility.

Rating Action

On Nov. 26, 2012, Standard & Poor's Ratings Services affirmed its 'AA/A-1+' long- and short-term sovereign credit ratings on the Emirate of Abu Dhabi, a member of the United Arab Emirates (UAE). The outlook is stable.

Our transfer & convertibility (T&C) assessment for Abu Dhabi is 'AA+'.

Rationale

The ratings on Abu Dhabi are anchored by the emirate's strong fiscal and external positions, which allow it to deploy fiscal policy flexibly. In addition to providing fiscal flexibility, the exceptional strength of the government's net asset position provides a buffer to counter the negative impact of oil price volatility on economic growth and government revenues, as well as on the external account.

The ratings are constrained by our view that the emirate has weak political institutions, a lack of transparency and public accountability, and limited availability of timely financial and economic data, particularly regarding government assets. The ratings are also constrained by the contingent liabilities from Abu Dhabi-based government-related entities (GREs), as well as those related to the UAE more broadly. Limited monetary policy flexibility in view of the pegged exchange rate and the underdeveloped domestic bond markets also constrains the ratings.

The Emirate of Abu Dhabi is among the wealthiest economies in the world; we estimate GDP per capita at $110,000 in 2012. Real economic growth accelerated to 6.8% in 2011, bolstered by strong performance in the oil sector, with oil production increasing by 9% to 2.5 million barrels per day. Diversification efforts and government public spending have helped sustain non-oil economic growth at 4%, boosted by activity in the financial sector, manufacturing, and transport. We expect real GDP growth in 2012 to be around 5%, premised on 6.4% growth in oil output, together with a 4% growth in non-oil sectors. Real per capita growth has been negative in 2007-2011, however, with high annual population growth of 7.7% during these years, in part due to the large inflow of migrant workers, many of whom earn far less than most citizens. We believe that in the case of a heavily resource-based economy, growth in nominal per capita GDP may be a better measure of the population's purchasing power than real growth.

Assuming an oil export price of $112 per barrel this year, we estimate the fiscal surplus at 15.4% of GDP, following a surplus of 13.4% of GDP (including petroleum dividends and investment income) in 2011. Revenue growth of 57% accommodated a 25% increase in expenditures, including hikes in development spending, ongoing financial support to GREs, and assistance grants. Government spending in Abu Dhabi rose by an annualized 19% in 2008-2011 in response to the global credit crisis, and to meet higher social and public infrastructure needs in Abu Dhabi and the northern emirates. Abu Dhabi expects spending in nominal terms to slow this year and be below the amount budgeted for 2012. In 2013-2015 and assuming that oil prices remain around $100 per barrel, we expect the fiscal surplus to average 10% of GDP, helping to further build the emirate's net external asset position.

The government's substantial net asset position, which we estimate at 191% of GDP in 2012, provides it with a comfortable buffer to meet contingent liabilities that may arise, particularly from GREs. In addition to reviewing the pace of GRE spending last year, the government is tightening its monitoring and control over public sector debt to ensure debt sustainability over the medium term and mitigate financial risks. Our estimate puts the debt of Abu Dhabi's GREs at around 50% of 2011 GDP.

Political institutions in the UAE are underdeveloped relative to many nonregional peers, in our opinion. The decision-making process is highly centralized and lacks checks and balances. Moreover, there are data gaps and inconsistencies, particularly with regard to transparency on government assets.

The leadership in the UAE is highly focused on domestic stability and security, and calls for political reform are not tolerated. The underpinnings of domestic stability are strong: Emiratis constitute a fairly homogenous demographic, which is largely supportive of the federation, and we understand that they believe the welfare system and other support from the government will safeguard their wellbeing. Furthermore, citizens have routine access to their leaders through regular meetings during which they can communicate their needs and misgivings.

The UAE is located in a geopolitically difficult region. Foreign policy is set at the federal level and formulated to balance the country's political alliances within the Gulf Cooperation Council and internationally, and to support its strategic and economic ties, including those with Iran. We note that Abu Dhabi is taking measures to ameliorate its exposure to some of the regional risks by completing a new oil pipeline, which will allow it to export close to one-half of its oil output outside of the Straits of Hormuz.

Outlook

The stable outlook balances Abu Dhabi's economic resilience and policy flexibility resulting from its exceptionally strong external and fiscal net asset positions against the risks emanating from structural and institutional weaknesses that could derail growth, as well as against its high contingent liabilities and limited monetary policy flexibility.

We could consider raising the ratings if there were significant improvements in transparency and governance, better availability of financial and economic data, and progress in institutional reforms. Moreover, measures to improve monetary flexibility, such as strengthening the monetary policy framework and developing domestic capital markets, could eventually be positive for the ratings.

The ratings could come under pressure if there were a sharp and sustained decline in oil prices leading to a sharp deterioration in fiscal and external balances, or if there were a prolonged depletion in the government's asset position. The ratings could also face pressure if domestic events compromised political and economic stability.

Related Criteria And Research

-- Sovereign Government Ratings Methodology Addendum For Sovereigns With Limited External Data, Nov. 7, 2011

-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011

-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Ratings List

Ratings Affirmed

Emirate of Abu Dhabi

Sovereign Credit Rating AA/Stable/A-1+

Transfer & Convertibility Assessment AA+

Senior Unsecured AA

Waha Aerospace B.V.

Senior Unsecured* AA

*Guaranteed by Emirate of Abu Dhabi