Rising Abu Dhabi property prices don't pose risk to banks: Fitch

Rising residential real estate prices doesn’t pose a serious risk to Abu Dhabi banks as the industry is not reliant on leverage but backed by stronger fundamentals, Fitch Ratings said.

“Bank performance has improved in line with the strengthening of the local and Dubai economies. NPLs (non-performing loans) of Abu Dhabi banks have declined to a five-year low and provisioning at a six-year high, although asset quality issues remain.

“Capital adequacy is high, at 17.8 per cent at end-March 2014. Fitch does not consider that surging residential real estate prices pose a serious risk to banks. Unlike the 2008 boom, the current run-up in prices is not reliant on leverage and is backed by stronger fundamentals. The authorities are also more attuned to the risks from rising house prices. Rising rents and a buoyant economy are pushing up inflation, which is forecast to average 5 per cent in 2016,” Fitch said in a note.

Abu Dhabi’s residential property prices increased 17 per cent in the first half of 2014, JLL said in its latest Abu Dhabi Real Estate Market Overview.

Foreign assets increase to 178%

The international ratings agency said sovereign net foreign assets of Abu Dhabi are estimated to have increased to 178 per cent of GDP at-end 2013, from 151 per cent of GDP one year earlier, sufficient to cover five years of government spending, Fitch Ratings said.

Abu Dhabi GDP is estimated to have grown 4.8 per cent to Dh953.24 billion in 2013, the Statistics Center of Abu Dhabi (SCAD) announced in March.

The repayment of a Eurobond in early 2014 has cut central government external debt to 0.6 per cent of GDP. Sovereign net foreign assets are conservatively forecast to remain around 170 per cent of GDP by end-2016.

Abu Dhabi's external sovereign balance sheet is estimated to be the second-strongest of all countries rated by Fitch, behind Kuwait (AA/Stable), the ratings agency said.

Abu Dhabi tends to record large fiscal and current account surpluses. Although fiscal spending rose by around 3 per cent of GDP and revenue fell slightly in 2013, a near-double digit fiscal surplus was recorded once Abu Dhabi National Oil Company dividends and Abu Dhabi Investment Authority (Adia) investment income are included.

Fitch affirmed Abu Dhabi's long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' with stable outlooks.

Oil revenues

Abu Dhabi’s falling oil revenues, in line with Fitch's price forecasts, will narrow the surplus each year to 2016. The current account surplus is estimated by Fitch to fall to 7.6 per cent of GDP in 2016 from 16.6 per cent of GDP in 2013.

Fitch forecasts Brent crude to average $108/b in 2014, $100/b in 2015 and $95/b in 2016. Abu Dhabi could likely tolerate much lower prices over the forecast period without facing undue pressure on its rating.

Real GDP growth is well in excess of peers, at 5.2 per cent in 2013. Non-oil growth was 7.4 per cent, the fastest in seven years, and has averaged 7.9 per cent over the past decade. Non-oil growth should remain buoyant over the forecast period, supported by project spending, a benign external environment and positive domestic sentiment.

Debt of government-related enterprises (GREs) and state-owned enterprises (SOEs) fell to 35.4 per cent of GDP in 2013 (around one-quarter of this is non-recourse), reflecting the authorities' commitment to containing indebtedness.

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