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Moody’s places Abu Dhabi in downgrade review

|By Arabian Post Staff| Moody’s has placed United Arab Emirates, along with Abu Dhabi emirate,  under review for a possible downgrade. The action was also applied to all GCC countries, including Kuwait and Saudi Arabia.

Abu Dhabi’s (Aa2 stable) economic growth could come under pressure this year amid government spending cutbacks in response to lower oil prices,  Moody’s Investors Service said in a report.

Moody’s estimates that the emirate’s real GDP growth will slow to 3.1% in 2016 compared to 3.4% in 2015. The non-oil economy and expanding oil sector have so far allowed Abu Dhabi to avoid a recession, but lower government spending on infrastructure projects is likely to dampen non-oil growth.

Higher oil production and refining volumes will only partially offset the likely slowdown in non-oil sectors of the economy.

“A prolonged period of low oil prices could gradually erode the emirate’s fiscal buffers if it does not maintain its prudent budgeting. In 2016, the emirate’s deficit will likely widen to 14% of GDP,” says Steven A. Hess, a Moody’s Senior Vice President.

“However, even if global prices fall further the government will be able to finance fiscal deficits for 5 to 10 years by liquidating assets. Overall, the country’s considerable foreign assets should mitigate the negative consequences of oil price volatility on Abu Dhabi’s fiscal and external accounts.”

Abu Dhabi’s liquidity risks are limited, with a very low debt burden relative to other investment grade countries. Public sector debt falling due in 2016 accounts for 4.8% of GDP, with direct government obligations representing only 0.2% of GDP.

Moody’s assesses the country’s susceptibility to event risk as medium, given volatile regional geo-political tensions. The rating agency notes the periodic rise of these tension as a rating constraint.

Moody’s Investors Service announced actions via separate releases on the ratings and outlooks of 18 oil-exporting sovereigns to reflect the impact of the continued large fall in oil prices, which Moody’s expects to remain low for several years.

For 12 sovereigns, the rating agency has initiated reviews for downgrade to assess the full impact of the oil price shock in a systematic and consistent manner. In four cases, Moody’s has downgraded the ratings and placed them on review for further downgrade to reflect the minimum impact that it believes the fall in prices will have on those sovereigns’ credit profiles.

Moody’s said it aims to conclude all rating reviews within two months. Moody’s has also affirmed the ratings of two further sovereigns but assigned a negative outlook to one of them. The full list of affected sovereigns and the corresponding rating action is provided below.

Moody’s also published a report to provide further insight into its views and the analytical considerations that drove the rating actions.

The report, entitled “Oil-Exporting Sovereigns — Global: Key Drivers of Rating Actions on 18 Issuers to Assess Impact of Sharp Fall in Oil Prices”, explains that the continuing fall in oil prices has material, and in some cases quite profound, implications for the economic growth and the balance sheets of sovereigns that rely to a large extent on oil and gas to drive their growth and finance their expenditures. Given the importance of economic and fiscal strength in Moody’s sovereign risk analysis, the rating agency believes that the credit risk profiles of these oil-exporting sovereigns are therefore under increasing pressure.

In January, Moody’s latest oil price forecasts announced a further downward revision of its oil price forecasts for Brent to US$33 per barrel in 2016 and US$38 per barrel in 2017, rising only slowly thereafter to US$48 by 2019.