Fitch: Abu Dhabi stimulus confirms fiscal adjustment is over


HONG KONG/LONDON — Abu Dhabi's new economic stimulus program will have limited sovereign credit impact given the sovereign's strong balance sheet and low fiscal break-even oil price, Fitch Ratings said.

But it highlights the winding down of fiscal adjustment and suggests that the fiscal policy-making framework has seen little improvement during the period of low oil prices, despite sharp spending cuts and increases in non-oil revenue

Sheikh Mohammed Bin Zayed, Abu Dhabi's crown prince, earlier this month approved a three-year stimulus package worth AED50 billion ($13.6 billion), or around 6% of Abu Dhabi GDP. Objectives include job creation, increasing tourism, and improving private sector development.

Full details have yet to be set out and government departments will spend the next three months preparing their spending plans. To support the private sector and attract investment, they have also been instructed to speed up payments to private sector suppliers and ease licensing requirements and regulations for companies.

Abu Dhabi's fiscal break-even oil price is among the lowest for Fitch-rated oil producers, estimated at slightly above $60/bbl, and its fiscal and external positions are among the strongest, with sovereign net foreign assets estimated at 281% of GDP last year, and government debt at just 8% of GDP.

As such, spending the budgetary windfall created by higher oil prices should have a limited impact on key metrics. Fitch has increased its oil price forecasts to $70/bbl for 2018 and $65/bbl for 2019, from $57.5/bbl for both years. Under these new forecasts, and assuming the gradual ramp-up of stimulus spending, we now expect budget surpluses of 3.2% of GDP in 2018 and 0.9% in 2019, from an estimated deficit of 3.2% of GDP in 2017. These figures include the estimated investment income of the Abu Dhabi Investment Authority.

Strong fiscal and external metrics are key credit strengths that support Abu Dhabi's 'AA'/Stable sovereign rating. A 25% spending cut between 2014 and 2016 helped safeguard fiscal strengths, at the expense of a slowdown in non-oil growth. Some structural fiscal adjustments have been made, including energy subsidy reforms and the introduction of VAT at the start of this year, although it is still not clear to what extent VAT revenue will accrue to the individual emirates of the UAE. The UAE was the first member of the GCC to link domestic petrol prices to international benchmarks.

But the stimulus package confirms our view, expressed when we affirmed the sovereign rating in December last year, that active fiscal adjustment to the 2014 oil price shock is over. Spending targets were revised higher throughout 2017, largely due to higher foreign aid and federal contributions, and SOE funding (the areas that saw the biggest cuts in 2014-2016).

Moreover, the decision to adopt a stimulus package during a period of high oil prices suggests that fiscal policy is still not grounded in a medium-term framework, and annual budgets represent only a weak constraint to spending. The overall economic policy-making framework remains a weakness relative to 'AA' category peers outside the GCC region.

Alongside higher oil prices, the stimulus package will support Abu Dhabi's growth recovery. We expect non-oil growth of 3.5% in 2018 and 4.0% in 2019, from 1.8% in 2017. The reforms of the type outlined would further support improvements in the business environment, giving some boost to non-oil growth and diversification over time, but Abu Dhabi's economy will remain highly reliant on hydrocarbon production and government spending for the foreseeable future. (All opinions expressed are those of Fitch Ratings). — SG