Moody›s Investors Service has changed the rating outlook on the Government of Abu Dhabi to stable from negative. Concurrently the long and short-term issuer ratings have been affirmed at Aa2/P-1. The key drivers of the outlook change to stable are (1) an effective and broad policy response to the lower oil price environment via an acceleration in the reform agenda; (2) the economy›s growth prospects, supported by a healthy banking system and (3) an easing of contingent liability risk. As part of rating action released last May 25, Moody›s has also affirmed the senior unsecured bond rating at Aa2 and the long-term and short-term MTN program ratings at (P)Aa2 and (P)P-1, respectively. The weaker oil price and its impact on government finances and the economy has prompted a substantial acceleration in reforms containing fiscal pressures and supportive of the emirate›s diversification strategy. The authorities have enacted broad subsidy reforms and expenditure cuts. Fuel, electricity and water prices were increased more rapidly and effectively than in other Gulf Cooperation Council (GCC) countries. Together with these reforms, reductions in capital expenditures and transfers allowed Abu Dhabi›s government spending to shrink by 23% over two years. Further progress has also been made in diversifying revenue. Moody›s believes that the UAE is better prepared than its GCC neighbors to implement a new value-added tax in 2018. In addition, a new municipal fee on rental contracts of the expatriate population has been levied, and the authorities are reportedly considering the introduction of a corporate income tax. During the up-phase of the commodity cycle, the Abu Dhabi government had already taken active measures to reduce the economy›s sensitivity to oil price shocks by sponsoring major infrastructure projects, fostering a conducive business environment and distributing resources to government-related entities to invest at home and abroad. As a result of the reform program and stabilizing oil prices, Moody›s expects Abu Dhabi›s fiscal deficit to come down to 2.0% of GDP in 2017 and 0.3% of GDP in 2018, after our estimates of the oil company (ADNOC)›s dividend to the Abu Dhabi Investment Authority (ADIA) and ADIA›s investment income are taken into account. The emirate government›s debt burden is likely to reflect these declining deficits and stabilize at very low levels, below 8% of GDP by 2018, assuming no contingent liability risk materializes. The rating agency considers that the emirate›s fiscal buffers have not been materially impacted by the recent deficits and, with sovereign-wealth fund assets estimated at more than 200% of GDP, those buffers continue to provide ample shock absorption capacity. Moody›s expects Abu Dhabi›s non-oil real GDP growth to slow to 1.9% in 2017, from 8.6% in 2014, reflecting lower government spending, a decline in real estate investment, and a drop in goods exports that was partially offset by higher re-exports and tourism activity. While sentiment has improved with firmer oil prices, one reason for weaker 2017 growth is our expectation that crude oil output will decline slightly due to production cuts decided during the recent OPEC agreement. However, Moody›s estimates that real GDP growth will eventually pick up from 1.5% in 2017 to 2.2% in 2018, bolstered by a rebound in hydrocarbon activity, but also improvements in the government›s fiscal position that will support an acceleration in government spending as well as improved liquidity in the domestic banking system that will reinforce credit growth. Although non-performing loans have increased to an estimated 5.0% of gross loans, the banking sector is well positioned to weather asset quality pressures. With a capital adequacy ratio of 18.9%, the banking system is well positioned to support the economic recovery through credit expansion as liquidity conditions are improving. By global standards, the system›s loan-to-deposit ratio is manageable at around 96%, providing head room for an expansion of its loan book to a corporate and household sector whose balance sheets have remained healthy overall despite the impact of the oil price shock on the economy and government spending. — SG
