The UAE economy has retained strong credit ratings amid the unprecedented economic crisis caused by COVID-19 and the consequent collapse of oil prices. Last week, credit rating agency Fitch Ratings assigned ‘AA-’ rating to the federal government of the UAE with a stable outlook. The credit rating and the outlook reflects the UAE’s strong government finances with moderate consolidated public debt level, strong net external asset position and high GDP per capita. The fiscal rectitude of the government amid a global economic crisis and the strong external position with ample reserves make the UAE a winner in credit strength.

The UAE federal government is currently required by law to balance its budget and has a track record of doing so. It has no debt of its own but plans to start issuing debt soon, mainly for building a yield curve and developing domestic financial markets. Strong foreign asset position of the UAE, primarily driven by Abu Dhabi’s large sovereign net foreign assets, ais a key source of credit strength for the federal government that is recognised by all rating agencies and constitute a backstop in the even to a need.

The exceptional strength of the Abu Dhabi government’s net asset position provides a buffer to counteract the effect of oil price swings and COVID-19 on economic growth, government revenue, and the external account, as well as the effect of geopolitical uncertainties in the Gulf and the potential crystallisation of contingent liabilities of local governments and government-related entities (GREs).

Going by the recent rating actions by other leading credit rating agencies such as the Moody’s and Standard & Poor’s, the GCC countries, in general, have fared better among the emerging market universe with the UAE and Kuwait rated the most creditworthy among emerging market sovereigns. Sovereign credit ratings have become increasingly important as countries around the world tap international bond markets. These credit ratings — issued to national governments — take into account political risk, regulatory risk and other unique factors in addition to the fiscal health to determine the likelihood of a credit default.

As sovereign ratings reflect the creditworthiness of governments, it will have a bearing on the cost and availability of credit to the government. Besides, as sovereign’s credit strength is the ultimate national benchmark, it will reflect the creditworthiness of local governments, GREs and corporates within the national jurisdiction. In essence, the strong sovereign credit ratings are a source of confidence for the entire economy and its financial ecosystem.