Fitch Ratings affirmed Abu Dhabi’s long-term issuer rating of AA on Thursday and assigned it a stable outlook based on its strong fiscal and external metrics and high gross domestic product (GDP) per capita. “Sovereign net foreign assets are estimated to be the third-largest among Fitch-rated sovereigns, at 185 per cent of GDP in 2018, and government debt is among the lowest, at a forecast 11 per cent of GDP at end-2019," Fitch said in a statement. A moderation of oil prices will result in lower revenue, only partly offset by a contraction of spending, according to the ratings agency. It expects a fiscal surplus of 1.9 per cent of GDP in 2019, down from 3.3 per cent in 2018. Abu Dhabi’s budget is expected to slip into a deficit of 1 per cent of GDP in 2020 and 2.3 per cent in 2021, as Brent oil prices progressively slide to $60 per barrel, oil production remains broadly stable and moderate spending growth resumes. “Underlying domestic expenditure (excluding aid payments and the federal contribution) will rise and constitute a loosening of fiscal policy following significant structural fiscal reforms and spending cuts undertaken in 2015 and 2016 and the resulting slower GDP growth," Fitch said. Government spending was cut by a cumulative 25 per cent between 2014 and 2016 and various fees and taxes were raised. The UAE government introduced a 5 per cent VAT starting in 2018, after introducing excise tax in October 2017. The rating agency estimates that Abu Dhabi's fiscal financing requirement will total $36 billion (Dh132.2bn) for 2019-2021. Spending is likely to contract about 5 per cent. “We estimate that although ADIA (Abu Dhabi Investment Authority) interest and dividend income could cover most of the financing needs, the government could proceed with new bond issuance to take advantage of a favourable interest rates environment," Fitch said. Abu Dhabi issued bonds for $10bn in September, which received strong interest from international investors. "Strong financial market returns may have allowed ADIA to mostly preserve the value of its assets in recent years, even as they have been used to finance the deficit," Fitch said. "We estimate ADIA's foreign assets at $487bn at end-2018."<br/> The ratings agency expects real GDP growth of 1.3 per cent in 2019, from 1.9 per cent in 2018 which was driven by higher oil production. Abu Dhabi's non-oil growth is expected to pick up moderately to 1.4 per cent in 2019 and 2-2.5 per cent in 2020-2021, from 0.6 per cent in 2018. Oil production is expected to be close to 3.1 million barrels per day in 2019, below current capacity of 3.5 million bpd. The planned expansion of oil production capacity to 4 million bpd by 2020 represents an upside to growth and government finances, Fitch said adding “it is unlikely to mobilise as long as the Opec+ agreement to cap production remains in place". “Long-term growth potential is supported by continued high public sector investments and structural reforms.”
