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26 February 2024

Geopolitical risks to hit Abu Dhabi’s rating

By Matt Smith




Geopolitical risks will prevent Abu Dhabi from increasing its credit rating in the immediate future, a senior analyst from global rating agency Standard & Poor’s (S&P) has warned.

Abu Dhabi is currently rated AA by S&P, which is two levels below the highest possible rating.

“We are already incorporating all Abu Dhabi’s strengths, particularly its fundamental wealth and asset positions,” said Farouk Soussa, Standard & Poor’s team leader of Middle East ratings.

“Abu Dhabi would have to address the current constraints to increase its rating and these are mainly geopolitical risks in the region, as well the relative lack of diversity in its economy.

“If pressures with Iran and tensions in Iraq ease, then we could see the ratings improving.” Soussa was speaking at the official opening of S&P’s Middle East headquarters at the Dubai International Finance Centre.

The US analysts currently provide ratings on 100 public and private sector entities across six Gulf countries, including the emirates of Abu Dhabi and Ras Al Khaimah. The latter was assigned an ‘A’ long-term and ‘A-1’ short-term foreign and local currency rating in January.

Global sukuk sales are likely to top $100 billion (Dh367bn) by the end of 2009, according to Jan Plantagie, S&P regional manager for the Middle East.

He said a “huge pipeline” of sukuks – Shariah-complaint bonds – will be launched either in the second half of this year or early in 2009.

International credit agencies such as S&P and Moody’s have been criticised for their role in the ongoing US sub-prime crisis, with many analysts saying they waited too long to cut the ratings of mortgage-backed bonds, and that they failed to adequately evaluate the risks inherent in sub-prime debt.

In response, S&P has announced 27 directives to increase transparency and improve information disclosure to investors.

S&P is part of a growing band of sceptics doubting whether a GCC monetary union can be achieved by the official 2010 deadline.

“This date looks very ambitious and we think it will be later than that. Kuwait has dropped its dollar peg, which makes it more complicated, while there are technical and political issues to be solved,” said Soussa.

Real estate has been a prime driver of Dubai’s economic boom, with property prices enjoying mega growth, but Soussa admits the bubble could yet burst.

He said: “A concern would be if the global slowdown results in a decrease in economic activity and so the number of expats relocating to the GCC, which is currently the main driver of demand, declines.

“But the construction boom of the GCC is very different from any experienced in the West.”

GCC sovereign wealth funds (SWFs) are refocusing their investments on their native region because opportunities in Western markets are diminishing. Soussa said: “Pursuing the best return means looking inside the GCC as well. The second reason is there’s now a greater capacity to absorb funds [in the GCC] and therefore more opportunities for development and so SWFs are looking inward as well.”

Soussa refused to comment on whether S&P will be rating Dubai in the near future. However, he praised the transparency of the region’s governments in supplying information on which to base its ratings, but admitted the quality of data was sometimes lacking.

Soussa added: “There’s room for improvement in terms of quality and breadth of information. This doesn’t affect our ability to complete our ratings, which are driven first by the government’s financial position and there is ample data on that.”

Net borrowing to reach $23bn

Net borrowing by Middle Eastern and African rated sovereigns may reach as much as $23 billion (Dh84.41bn) in 2008, a sharp increase from $7bn last year, according to Standard & Poor’s.

The hike is “due to a reduction in debt repayments and a rise in sovereign borrowing requirements”, S&P said in its fourth annual regional sovereign issuance survey. Despite the increase in borrowing, total new debt accounts for just 1.1 per cent of the combined GDP of the rated sovereigns.

The ratings agency “expects rated Middle Eastern and African sovereigns’ commercial medium and long-term borrowing to be $77.6bn in 2008, up from the $57bn borrowed in 2007. Of this, the vast majority, $54.2b, is required to refinance existing maturing debt, with the remaining $23.4bn reflecting new debt”.