JEDDAH — UAE’s economic growth was relatively strong at 3%, compared to 4.9% on average in 2011-15, with oil sector contributing more than one third to growth, Moody’s said in its Annual Credit Analysis for the Government of the United Arab Emirates report.

“We recently changed the outlook to stable to reflect the effective policy response to the low

oil price environment via an acceleration in the country's reform agenda and the ongoing

recovery in the fiscal and current account balances. Further improvements in policy and

data transparency at the emirate and UAE level, or a material appeasement in regional

geopolitical tensions and a stepped-up diversification effort would exert upward pressure,” Moody’s said.

However, it noted that “we would downgrade the UAE’s rating if a prolonged period of lower oil prices

and the crystallization of contingent liabilities placed the consolidated fiscal accounts under sustained pressure, or in case UAE's exports would be materially affected by an escalation in

regional tensions.”

The credit strengths of the United Arab Emirates (Aa2 stable) include assumed unconditional support from the Abu Dhabi (Aa2 stable) government, with estimated assets under management at the Abu Dhabi Investment Authority (ADIA) exceeding total liabilities

in the UAE's public sector. Superior infrastructure supporting diversification, very high per capita income and hydrocarbon reserves of more than 70 years at the current rate of production also support creditworthiness. In addition, the UAE's domestic politics have a track record of stability and the country has strong international relations.

The report further said UAE’s economic strength is 'Very High' reflecting its very high income level, moderately large size, abundant

hydrocarbon reserves with low cost of extraction, vibrant non-oil economy, and well-developed infrastructure. Given that a strict interpretation of the quantitative metrics in the scorecard does not fully reflect a country's credit profile, Moody’s have adjusted the UAE's factor score for economic strength upwards from the indicative 'Very High (-)' to a final score of 'Very High' to reflect the country's

exceptionally high wealth levels and the very large natural hydrocarbon endowment. The assessment of economic strength at 'Very High' is shared by Aaa-rated sovereigns like the Netherlands or Sweden and is one notch above that of oil-exporting peers in the Gulf Cooperation Council (GCC).

The report moreover said at $67,871 in purchasing power parity terms, the UAE’s 2016 GDP per capita ranked in the 95th percentile in our rated universe, well above all developed economies (except Norway, Luxembourg and Singapore, all Aaa stable). Although nominal per capita income has declined markedly in 2015-16 across all oil-exporting nations as a result of lower oil prices, the UAE remains in the highest category for per capita GDP in purchasing power parity terms, which we use as the main proxy for income level. The country’s economy is also

relatively large in nominal GDP terms – the second largest non-oil sector in the GCC, with the UAE at $297 billion and Saudi Arabia (A1 stable) at $479 billion – ranking in the top quartile of Moody’s-rated sovereigns and pointing to above-average resilience to shocks.

Hydrocarbons have served as the backbone of the UAE economy, directly contributing between 30 and 40 percent to nominal GDP historically. The share decreased significantly in 2015 and 2016 (to 17% in 2016) due to the collapse of the oil prices. The country’s proven oil reserves are at 97.8 billion barrels as of 2016, representing 5.7% of the world’s proven reserves and ranking 8th largest

globally. At the same time, setting the UAE apart from regional peers is its success in diversifying away from petrochemical industries and growing a competitive service sector. The services industries accounted for 78% of nominal GDP in 2016 and their share continues to increase over time, reflecting diversification.

Lastly, the UAE economy benefits from advanced infrastructure, conducive institutional and tax environment, and efficient markets for

goods and labor, which combine to produce the highest World Economic Forum competitiveness index in the Middle East and North

Africa region. Ranking 16th globally, the UAE is well positioned to make further progress in developing its non-oil economy.

Moody’s pointed out that since its independence in 1971, the UAE has enjoyed a high degree of internal political stability. This seems to be at least partly

explained by the elevated prosperity of most UAE citizens, the informal but effective consultative structures that exist within the traditional monarchic architecture, and the fact that the citizen body is ethnically and religiously homogenous. Political relations between individual emirates within the federation are constructive, bolstered by economic and familial ties, although transparency regarding inter-emirate political discourse is limited. As the UAE’s net migration rate remains elevated, the country’s population has grown rapidly and is more diverse than in neighboring countries. Nonetheless, this reliance on migrant labor presents little domestic

political risk.

Besides, the UAE’s banking system is moderately concentrated, with the four largest banks accounting for 60% of the market (after the merger of two large banks). The weighted average baseline credit assessment (BCA) of baa3 balances strong capitalization ratios, high liquidity, declining problem loans level, and active macro-prudential policymaking against a slowing economy and volatile oil and real estate markets. Other sovereigns with comparable weighted average BCAs include UAE’s regional peers (Kuwait) and several highly-rated non- GCC sovereigns (China, Germany, France).

Moreover, Moody’s report noted that We assess the UAE’s external vulnerability as 'Very Low'. This assessment incorporates the country’s persistent and high external surpluses weighted against moderate reliance on external capital inflows. Averaging under 17% over 2011-2014, the UAE’s current account surplus relative to GDP was well below Kuwait’s 40%, Qatar’s 30% or Saudi Arabia’s 19%. Although not as high, the UAE’s current account is more stable than in its peers due to a smaller oil export component. In 2015, the UAE's current account surplus shrank by 8.8 percentage points to 5.8% of GDP, while Kuwait and Qatar's surpluses declined by 26.9 and 16.0 percentage points, respectively, and are now at essentially the same level as the UAE.

“We have adjusted the score for the UAE's external vulnerability risk downwards from an indicative score of 'Moderate' to a final score of 'Very Low' because we believe that the country's vulnerability to external risks is less pronounced than quantitative indicators would suggest, given the UAE's sizable foreign assets.”

The UAE’s external breakeven oil price is projected to decline to $44 per barrel in 2016. This relatively low sensitivity to oil prices reflects a high share of re-exports and non-hydrocarbon goods in the UAE’s export mix. Apart from being less correlated with

commodity prices, these two export categories are likely to improve on higher demand from Iran and Iraq, two of the UAE’s main reexport markets.

Similar to its GCC peers and other major financial centers, we estimate that the UAE benefits from a large positive net international investment position (IIP). Although not officially published, historical financial flows, sovereign wealth fund assets, and external debt data suggest that UAE’s net IIP may be as high as 130% of GDP, ranking in the top quartile globally. ADIA’s assets, estimated at approximately 160% of GDP and invested primarily overseas, represent the main component of the country’s net IIP, far exceeding the stock of external debt, which is expected to exceed 70% in 2016. At their current levels, combined assets of ADIA and the central bank

are sufficient to cover the country’s external debt and decades of current account deficits. — SG