Capital Intelligence, the international emerging markets rating agency, has raised United Arab Emirates' (UAE) long-term foreign currency rating to A+ from A and its short-term foreign currency rating to A1 from A2.The ratings agency also assigned a long-term local currency rating of A+ to the sovereign and a short-term local currency rating of A1. The long-term outlook is stable.
UAE's ratings reflect the country's substantial hydrocarbon wealth, relative success in diversifying the economy, low public sector indebtedness, and strong external finances. The authorities' vast holdings of foreign assets provide them with a high degree of flexibility to respond to economic and financial shocks.
UAE has the third largest proven oil reserves in the world and these are expected to last for well over 100 years. Abu Dhabi, where over 90 percent of reserves are located, has recently embarked on an investment program aimed at increasing sustainable production capacity in the medium term, and oil is likely to remain the mainstay of the UAE economy for some time to come. Nevertheless, efforts to diversify the economy away from hydrocarbons are continuing successfully, especially in Dubai. The contribution of non-hydrocarbon sectors to real gross domestic product (GDP) increased from 68 percent in 1994-96 to 77 percent in 1999-2001, and these sectors have increased the economy's export capacity.
UAE has accumulated a substantial stock of foreign assets following 20 years of current account surpluses. The country is a net creditor vis-à-vis the rest of the world as a result. Large surpluses on the trade and investment income balances have more than offset structural deficits on services and transfers. Trade dynamics have improved in recent years as evidenced by the gradual decline in the non-oil trade deficit from 25.6 percent of non-oil GDP in 1995 to 15.7 percent in 2001.
A large portfolio of foreign and domestic assets has enabled the consolidated budget deficit to be financed entirely from investments and the drawdown of domestic bank deposits. There is no reported external debt in the government sector and resident commercial banks' claims on the non-financial public sector are relatively low at 8.7 percent of GDP at end-2002; government deposits with the central and commercial banks amount to nearly 19 percent of GDP.
According to CI estimates, total external debt has declined from around 42 percent of GDP, 70 percent of current account receipts less re-exports, in 1998 to just over 27 percent in 2002. Much of this debt is in the form of banking sector foreign liabilities, part of which represents intra-office flows to branches or subsidiaries. Non-bank external debt is estimated at 16 percent of GDP at end-2002.
With modest public and private sector foreign liabilities and ample international liquidity, UAE's short-term vulnerability to external shocks is limited. Official foreign exchange reserves have comfortably exceeded short-term external debt in recent years. UAE’s international reserves do not include the accumulated foreign assets of the Abu Dhabi Investment Authority, which are conservatively estimated to be worth more than $100 billion. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
