The restructuring of troubled property developer Dubai World is unlikely to harm the credit ratings of the United Arab Emirates and Abu Dhabi, ratings agency Moody's Investors Service said Monday. Moody's issued the following statement: “Moody's Investors Service today said that the recently announced restructuring of Dubai World's liabilities is unlikely to threaten the credit quality of the government of Abu Dhabi and the federal government of the United Arab Emirates (UAE). Both of these governments are rated Aa2 with a stable outlook.” Moody's said the adverse impact of a Dubai World restructuring on the non-hydrocarbon sectors of the domestic economy could potentially be severe, especially in Dubai. “However, overall macro-economic stability is protected by the country's strong net external creditor position that is bolstered by Abu Dhabi's accumulated oil wealth,” said Tristan Cooper, head analyst for Middle East Sovereigns at Moody's in Dubai. Significantly, the rating agency notes that the Dubai World restructuring has effectively reduced the government's contingent liabilities by highlighting the limits of government support for indebted state-owned companies. “However, the event has also underlined some of the concerns that Moody's had previously highlighted regarding economic data, transparency, and the clarity of policy formulation,” Cooper said. The main factor underpinning the UAE's high investment-grade sovereign rating is its robust external position. This is largely due to the ample stock of offshore financial assets held by the Abu Dhabi Investment Authority (ADIA), the state-owned entity responsible for investing the bulk of Abu Dhabi's oil-driven fiscal surpluses. In November 2009, Moody's received verbal assurances from the government of Abu Dhabi that the assets of ADIA continued to amount to more than twice the value of Abu Dhabi's GDP. The latest official data indicate that Abu Dhabi's GDP approximated $142 billion in 2008, which would imply a minimum figure for ADIA assets of $284 billion. Such figures are corroborated by the accumulation, year after year, of the wide fiscal surpluses of Abu Dhabi. Hence, ADIA's foreign assets alone are considerably greater than the external liabilities of the country, even according to pessimistic estimates. The margin of comfort widens when taking into account the foreign assets of the central bank, local commercial banks, other state-owned enterprises and the non-bank private sector. Moreover, the fiscal position of the UAE, and Abu Dhabi in particular, remains healthy. The UAE's consolidated fiscal surplus has averaged at around 20 percent of GDP over the past five years and is likely to post a small surplus in 2009 despite a sharp fall in oil export revenues and surging expenditure at the Abu Dhabi and federal levels. Moody's said Abu Dhabi's public finances are even stronger: “The fiscal firepower of Abu Dhabi, and by extension that of the federal government, is backed by the reserves of ADIA and other state-owned entities in Abu Dhabi, including the Abu Dhabi Investment Council and the state-owned oil company ADNOC,” Cooper noted. Moody's believes that the country's strong consolidated external and fiscal positions will help it to weather the inevitable shock to the non-hydrocarbon sector. It is highly likely that Dubai's economy, which accounts for around a third of the UAE's total GDP, will be impacted heavily by the announced restructuring of Dubai World. The company is the largest state-owned conglomerate in the emirate with interests in virtually every sector of the local economy. “The economic repercussions of the crisis surrounding Dubai World have yet to play out but could potentially be substantial, notwithstanding the central bank's assurance that it stands fully behind the country's banks,” Cooper further said. However, it is notable that the fiscal revenues of Abu Dhabi - the largest contributor to the federal budget - are largely insensitive to developments in the non-hydrocarbon sector as they are mostly generated from oil exports, he added. The announced restructuring of Dubai World and Nakheel - which Moody's does not rate -has shown that there is a limit to the willingness of the Abu Dhabi and federal governments to support indebted state-owned companies in other emirates. The rating agency had previously assumed a high likelihood that any strategically important state-owned enterprise in Dubai would be supported. Further to last week's announcements about Dubai World, Moody's announced on Nov. 26 a downward revision of its assumptions regarding government support for Dubai's government-related issuers (GRIs). This has led to a partial reduction of the agency's estimation of the extent of the contingent liabilities of both the federal and Abu Dhabi governments. However, the Dubai World episode has underlined some of the institutional shortcomings that Moody's had previously highlighted in its sovereign reports. In particular, Moody's noted the continued limited availability of information regarding the consolidated finances and debt burdens of state-owned enterprises in the country and the degree to which they could impact the banking system and public finances. Moody's last rating action on the UAE's sovereign rating occurred in July 2007, when the country's foreign and local currency government bond ratings were upgraded to Aa2. The last rating action on Abu Dhabi was in July 2007, when Moody's assigned Aa2 ratings to the emirate.
