Moody's Investors Service today upgraded the foreign and local currency government bond ratings of the United Arab Emirates (UAE) to Aa2. In an associated action, the country ceiling for foreign currency bank deposits was also raised to Aa2. The country ceilings for foreign and local currency bonds remain at Aa2. The short-term rating also remains unchanged at Prime-1 (P-1). The outlooks on all ratings are stable.
The primary factor driving the upgrade was the ongoing strengthening of the government's balance sheet. "Persistently high oil prices have allowed the government to continue to accumulate significant foreign assets at a rapid rate" said Tristan Cooper, Moody's Vice-President and Senior Analyst. "This has led to a further strengthening of the government's fundamental creditworthiness." The government is expected to run a fiscal surplus of more than one-fifth of GDP again this year and the ratio of direct government debt to GDP is expected to remain very low, said Cooper.
Although there are some indications of economic overheating in certain economic sectors, the risk of macroeconomic instability is low. Economic diversification is proceeding apace as the non-hydrocarbon side of the economy grows quickly. The rise in inflation in recent years was primarily caused by supply bottlenecks in specific sectors of the economy, and is expected to decline gradually as those constraints are addressed. Moreover, the current account surplus will likely remain in a substantial surplus this year as high oil prices have boosted hydrocarbon exports. Both the government and the private sector hold substantial net foreign assets, much of it in liquid securities.
Geopolitical risks and institutional weaknesses continue to weigh on the rating, noted Cooper. "Despite the government's extraordinary financial strength, the ratings are constrained by the country's political, administrative and legal institutional development, which lags that of other similarly rated countries," said Cooper. The domestic political regime is highly stable, but broader geopolitical tensions surrounding Iraq, Iran and the wider region also create a more hazardous environment than exists for the most highly rated sovereigns. However, the UAE receives strong support from the international community in recognition of its strategic importance.
