Abu Dhabi is well-positioned to weather a sustained period of low oil prices and slow global economic growth due to its strong public finances, according to a major international ratings agency.
Over the past decade, Abu Dhabi has stored a significant portion of its oil earnings offshore, and can now tap that wealth to insulate important banks and government-owned companies from the global economic crisis, Moody’s Investors Service said in a report.
The emirate, which derives most of its income from oil exports, will also continue to run a fiscal surplus as long as oil stays above $30 a barrel, the agency said. The price of oil fell to $37 a barrel this week, the lowest level in four years.
“Abu Dhabi is better placed than other emirates and most other countries to ride out the global economic downturn,” Moody’s said.
The agency gave Abu Dhabi a credit rating of Aa2, or “very high investment grade” due to “the prodigious strength of the Government’s balance sheet”. The rating is on a par with Kuwait and Qatar.
The emirate’s financial strength is a boon for the rest of the country, since Abu Dhabi would likely provide financial support to other emirates if necessary.
“We believe that Abu Dhabi stands fully behind the federal Government,” reported Moody’s. “The ratings of banks and important government-owned companies throughout the UAE are enhanced by our assumption of a high likelihood of federal and/or Abu Dhabi government support.”
Dubai already benefits from the assumption that the federal Government and Abu Dhabi would provide it with financial support, if necessary. Earlier this week, Fitch Ratings downgraded the individual ratings on two Dubai companies, explaining that implicit support from the federal Government kept the ratings from going even lower.
According to Moody’s estimates, Abu Dhabi’s debt amounts to about 14 per cent of its GDP, with US$1 billion (Dh3.67bn) in direct debt and $20bn in debt owed by government-owned companies. However, because of the emirate’s leadership position within the UAE, other emirates’ debts must also be taken into consideration when assessing Abu Dhabi’s finances, Moody’s said. The debts of Dubai and its related companies, for instance, amount to $80bn, or about 148 per cent of Dubai’s GDP.
Abu Dhabi has placed a large amount of its oil revenues in investment vehicles overseas. The largest portion of these assets are held by the Abu Dhabi Investment Authority, which controls at least $280bn by Moody’s estimate, or as much as $1 trillion, according to others. The income on those investments over time helps the emirate depend less on oil revenues directly for income.
Even if oil falls below $30 a barrel, Abu Dhabi’s Government could draw from such savings to maintain its current rate of spending for years without risking its financial stability, Moody’s said. This is despite the fact that government expenditures rose 30 per cent last year, and are expected to have risen about 50 per cent this year.
During the last week, oil prices fell to around $37 a barrel, down about 75 per cent from their high of nearly $150 a barrel in July. The drop came amid increasing signs of slowing global demand, even despite a decision from Opec that it would cut production by more than two million barrels a day.
Although Abu Dhabi’s financial position remains strong, other countries in the Gulf may suffer if oil prices remain low.
“If oil averages $45 a barrel next year, then I expect to see significant budget deficits in Bahrain, Oman and Saudi Arabia,” said Simon Williams, an economist at HSBC.
Some economists estimate that break-even oil prices for Saudi Arabia may be even higher. According to Jadwa Investment, a Saudi Arabian investment company, the country will post a fiscal deficit of $2.13bn next year if the price of US crude averages $70 a barrel.
“With oil revenues accounting for around 85 per cent of total revenues, the collapse in prices and lower production will have significant implications for the government budget,” Jadwa said in a recent research note.
However, many other Gulf countries have stored away portions of their windfall oil revenues in sovereign wealth funds, which should insulate them somewhat from volatility in oil prices and economic shocks.
“In the short term they would probably accept small surpluses or deficit because the cash cushions they have created with sovereign wealth funds can bear the burden,” said Giyas Gokkent, an economist at National Bank of Abu Dhabi.
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