OREANDA-NEWS. Fitch Ratings has affirmed Abu Dhabi's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA'. The Outlooks are Stable. The issue ratings on Abu Dhabi's senior unsecured foreign and local currency bonds have also been affirmed at 'AA'. The Short-term foreign currency IDR has been affirmed at 'F1+'. The UAE's Country Ceiling has been affirmed at 'AA+'; this Ceiling applies to Abu Dhabi and Ras al-Khaimah.

KEY RATING DRIVERS
The affirmation reflects the following factors:

Abu Dhabi's vast buffers provide resilience to the fall in oil prices that has occurred since mid-2014. The external sovereign balance sheet is the second-strongest of all countries rated by Fitch, behind Kuwait (AA/Stable). Fitch estimates that sovereign foreign assets rose to 184% of GDP at end-2014 compared with direct sovereign external debt of just 0.6% of GDP. Net foreign assets are forecast at 183% of GDP at end-2016 based on conservative assumptions for investment performance.

The government is cutting spending in response to lower oil prices. This should keep the overall budget (which includes estimated investment income and dividends from state oil company ADNOC) in surplus. Fitch judges that there is scope for significant cutbacks in aid, net lending to state-owned enterprises (SOEs) and transfers to the Federal Government, the areas targeted for the brunt of cuts in the 2015 budget. Trimming capital spending offers further scope for savings. The current account surplus is estimated to have exceeded 20% of GDP in nine of the past 10 years and is forecast at close to double digits in 2015 and 2016.

Real GDP growth tends to exceed peers and is estimated at 5.8% in 2014, with non-oil growth close to 7%. Non-oil growth has averaged 7.4% over the past decade, faster than growth in the oil sector for the bulk of this period. Lower government spending and a slowdown in neighbouring Dubai are expected to slow non-oil growth to around 4% to 2016.

Rising rents pushed inflation to a five-year high of 4.1% in December 2014. A stabilisation of house prices should contribute to inflation averaging below 5% to 2016 and has eased the limited risks to banks after a surge in real estate prices. Bank performance is improving in line with the strengthening of economy and NPLs continue to trend downwards.

Debt of government-related enterprises (GREs) and SOEs fell to an estimated 34.5% of GDP at end-2014, reflecting the authorities' commitment to containing indebtedness. Explicit contingent liabilities are clearly delineated and GREs and SOEs borrowing plans are scrutinised by the authorities. Abu Dhabi's ability to support its GREs and SOEs is not in question. Potential contingent liabilities are unlikely to be material compared with Abu Dhabi's assets.

The economy is heavily dependent on oil, which accounts for around 50% of GDP and around 85% of fiscal and external revenues. However, oil production per capita is one of the highest in the world and supports high GDP per capita. Proven oil reserves are large, production costs are low and production capacity and downstream facilities are being expanded.

Structural indicators are mixed relative to peers. GDP per capita is the second-highest of all Fitch-rated sovereigns, but human development indicators are below the median. The Doing Business score and most World Bank governance indicators have improved in recent years and are in line with the peer median, although voice and accountability is weak. The World Bank ranks political stability above the peer median and the political scene is stable. Fitch considers geopolitical risks to be elevated compared with some peers.

Economy policymaking tools, primarily at the federal level, are weak, although steps to develop the policy framework continue. A macro-fiscal unit has been established at the Department of Finance and the use of macro-prudential tools has increased. Nonetheless, Abu Dhabi is primarily dependent on its fiscal and external buffers to absorb shocks.

Major gaps in the transparency and availability of data remain despite recent improvements. In particular, a comprehensive external balance sheet is not published and there is less information on the sovereign balance sheet than peers. Few high frequency indicators are disseminated, although the publication of quarterly national accounts data has begun.

RATING SENSITIVITIES
The main factors that, individually or collectively, could lead to positive rating action are:
- Addressing deficiencies in structural indicators and strengthening policymaking institutions, relative to peers, which would ultimately be conducive to reducing the economy's dependence on oil.
- An improvement in the transparency and availability of key data.

The main factors that, individually or collectively, could lead to negative rating action are:
- A sustained period of oil prices sharply lower than Fitch's forecasts that materially erode fiscal and external buffers, coupled with the crystallisation of significant contingent liabilities.
- Spillover from a regional geopolitical shock that impacts economic, social or political stability.

KEY ASSUMPTIONS
Fitch forecasts Brent crude to average USD70/b in 2015 and USD80/b in 2016.

No major change is expected in the Abu Dhabi Investment Authority's relationship with and use by the Emirate of Abu Dhabi or in its investment guidelines.

Fitch assumes that regional geopolitical conflicts will not impact directly on Abu Dhabi or on its ability to trade and that the domestic political scene will remain stable.