OREANDA-NEWS. November 18, 2015. Fitch Ratings has affirmed Ras Al Khaimah's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A'. The Outlooks are Stable. The issue ratings on RAK Capital's senior unsecured foreign currency bonds have also been affirmed at 'A'. The Short-term foreign currency IDR has been affirmed at 'F1'. The United Arab Emirates (UAE) Country Ceiling has been affirmed at 'AA+'; this Ceiling applies to Ras al Khaimah and Abu Dhabi.

KEY RATING DRIVERS
The ratings balance the benefits of RAK's membership of the UAE, its low debt and solid fiscal performance against lingering weaknesses in data quality and the macro policy framework.

The emirate derives substantial support from its membership of the UAE federation. RAK shares the UAE monetary and exchange-rate system with a credible US dollar peg and absence of exchange controls. The UAE Country Ceiling of 'AA+' benefits from Abu Dhabi's (AA/Stable) strong external finances. RAK has no need for foreign exchange reserves and its rating is not constrained by external factors, compensating for the lack of external sector data.

RAK's public finances also benefit substantially from federal government (FG) support. Most basic public services and infrastructure are provided directly by the FG, relieving RAK's budget of many of the spending obligations of a typical sovereign and allowing it to pursue an economic development programme while keeping debt low. We do not factor potential exceptional support from the FG into the ratings.

Though being addressed by the authorities, data weaknesses still hamper analysis and comparison with peers. National accounts data are limited and not yet methodologically mature, resulting in frequent revisions. High-frequency data are also absent. Monetary and balance-of-payments data are compiled at the UAE level only and are of weaker quality than peers, with no international investment position data. The economic policy framework also exhibits some weaknesses relative to peers.

Ongoing reforms and improvements to data quality will enhance the authorities' capacity to manage the economy and formulate more reliable budgetary forecasts. Steps have been taken to improve fiscal accounting, capital budgeting and planning throughout government institutions and trading entities, and improvements are ongoing. A new cash budgeting process began in November 2014 and a new strategic planning exercise will be undertaken in November 2015. The government has moved its financial accounts from cash-based to accrual-based accounting and is implementing new accounting and cash management systems. Reporting of historical and interim budget outturns has also improved.

The authorities are also improving national accounts data and plan to begin reporting quarterly nominal GDP data in 2016. Training and fieldwork are ongoing in preparation for the release of quarterly nominal GDP numbers for 2015. Refinements to the size, composition, and growth figures of GDP may result from the annual economic survey for 2014, which the Department of Economic Development (DED) is set to finalise in November 2015. Reconciliation of methodologies between DED and the federal National Bureau of Statistics (NBS) has already resulted in a revised GDP series going back to 2001. The authorities also intend to set up an independent statistical data centre, pending details on the remit of a new Federal Competitiveness and Statistics Authority.

At an expected 21.2% of GDP in 2015, RAK's debt is well below the 'A' median of 44.4% and we expect it to fall over our forecast horizon to end-2017. A Sukuk issuance in March 2015 allowed the government to refinance its debt at lower cost, consolidate some existing debts, pre-finance a 2016 maturity and extend the maturity profile. Financial control has strengthened and transparency is high for the region, with fiscal data compiled across the public sector. Government guarantees (comprising 5% of GDP) are accounted for and falling.

Fitch projects a budget surplus of 1.1% of GDP in 2015, up from 0.8% last year and better than our previous forecast of a small deficit, despite a one-off equity injection to refinance the debt of a distressed real estate investment company (total equity injections were around 3.6% of GDP). The expected outturn is a result of lower-than-budgeted spending and conservative revenue forecasts. Capital expenditure in the first half of 2015 was only 10% of the budgeted amount, reflecting the lack of a consistent budgeting process throughout the government's trading entities, rather than a policy decision. Wages and salaries were lower than projected, mainly due to increases planned but not realised.

As a net oil importer but a major exporter of construction materials, RAK is indirectly affected by lower oil prices through a reduction of capital spending in the region. We expect that this will dent growth towards the end of our forecast period, as GCC countries (accounting for around 54% of RAK's exports) choose to run down their fiscal reserves and take a gradual approach to reining in government spending. Nevertheless, we still expect real GDP to expand by 4.5%-5% per year in 2015-2017, driven by construction, rising tourist inflows and manufacturing growth. Infrastructure spending, residential projects and an ambitious tourism development plan support construction. Manufacturing growth is set to be concentrated in free trade zones, which will benefit from improved rail and road links.

As in other emirates, voice and accountability and institutional constraints on executive power are weak compared with peers. RAK's economic policy management is developing, but lacks institutional structures benefitting other sovereigns in its peer group.

RATING SENSITIVITIES
The main factor that could lead to a positive rating action is continued strengthening of the macroeconomic policy framework, as evidenced in the availability and quality of data that could be used to better track the economy and the government's development programme.

A negative rating action could result from a weakening in public finances prompted by large, sustained increases in current spending or by a deterioration of the macroeconomic outlook.

KEY ASSUMPTIONS
- The current political and financial relationships linking individual emirates within the UAE federal system are assumed to be maintained. In particular, no weakening of support from the federal government and Abu Dhabi for the smaller emirates is envisaged.
- No challenge to the rule of the royal family or the current succession.
- RAK is in a volatile region. Fitch assumes that regional geopolitical conflicts will not impact directly on RAK or on its ability to trade.