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UAE Sovereign Rating Stable

“Risks from the banking and corporate sectors have increased and macroeconomic performance will weaken in 2009,” warned Capital Intelligence, in its latest assessment on the UAE, issued on Wednesday.

The sharp decline in oil prices and ongoing dislocation in global credit markets is likely to have a significant impact on the UAE, which derives the bulk of its fiscal and export revenue from oil and has become more reliant on external borrowing to finance investment and fund domestic credit growth.

Capital Intelligence expects real GDP growth to slow to around one per cent in 2009 from an estimated five per cent in 2008.

Oil revenue will shrink with cuts in output, while non-oil growth is likely to decelerate in response to tighter domestic financial conditions, declining asset values particularly for property, weaker external demand and a reduction in foreign investment and financing. The direct impact of the impending downturn on sovereign creditworthiness should be small in the short term.

Even with oil prices at $45 a barrel and sharply lower investment income, the budgetary position of the government and external current account are likely to remain in surplus in 2009.

Fiscal risks from contingent liabilities in other parts of the economy are more of a concern, but not enough at this stage to threaten the UAE’s ratings given the low level of the government debt, which is nine per cent of GDP and the country’s large net external creditor position estimated at 80 per cent of GDP, which greatly mitigates systemic external financing risks. Banking sector risks stem from the rapid growth in real estate credit in the context of a booming property market, which now appears to be headed for a significant correction, and a decrease in liquidity and funding sources.

The government injection of liquidity is appropriate and the fiscal cost likely to be small. The banking sector will be tested by the economic slowdown and decline in asset prices, with banks with significant exposure to Dubai’s real estate market likely to be among the worst affected.

Profitability will be challenged by rising non-performing loans and slower credit growth and some banks may ultimately need their capital buffers strengthened by the authorities.

In the corporate sector, indebtedness has increased substantially over the past few years and at least $15 billion of foreign currency debt is due for repayment in 2009.

The bulk of the debt falling due has been incurred by entities owned by or linked to the governments of Dubai and Abu Dhabi, though less than a quarter of the debt is explicitly guaranteed.

In the event of access to international capital markets remaining restricted, many of the larger corporates would probably be able to meet their financial obligations from internal resources.

Abu Dhabi may provide financial assistance to the companies in order to avoid a loss of confidence in the economy.

haseebhaider@khaleejtimes.com