December 12, 2016 / 10:49 AM / 7 months ago

Fitch Affirms Ras Al Khaimah at 'A'; Outlook Stable

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(The following statement was released by the rating agency) HONG KONG/LONDON, December 12 (Fitch) Fitch Ratings has affirmed Ras Al Khaimah's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A' with a Stable Outlook. The issue ratings on RAK Capital's senior unsecured foreign- currency bonds are also affirmed at 'A'. The United Arab Emirates (UAE) Country Ceiling has been affirmed at 'AA+'; this Ceiling applies to Ras al Khaimah and Abu Dhabi. Ras Al Khaimah's Short-Term Foreign- and Local-Currency IDRs are affirmed at 'F1'. KEY RATING DRIVERS The ratings balance the benefits of Ras al Khaimah's membership of the UAE, low debt metrics, strong growth and solid fiscal performance against persistent weaknesses in data quality and in the macro policy framework, as measured against 'A' category peers. The emirate derives substantial support from its membership of the UAE federation. It shares the UAE monetary and exchange rate system of a credible US dollar peg and absence of exchange controls. The emirate does not need its own foreign exchange reserves, and UAE support compensates for the lack of external sector data. Most public services and infrastructure are provided directly by the federal government, making the emirate's spending more flexible than peers' and relieving it of the obligations of a typical sovereign. The authorities are continuing to improve financial planning, budgeting and data collection, but this is a difficult task subject to delays and risks. Dedicated institutional statistics capacity is being added, but the new Statistics and Studies Centre will have to undertake extensive foundation work before it can substantially expand the set of information provided on economic developments. Regular reporting of quarterly GDP has proved to be elusive since 2012, held back most recently by the late introduction of the Federal Competitiveness and Statistics Authority. The government's Financial Planning and Analysis Division has introduced quarterly budgeting and performance evaluation, introduced a three-year budgeting cycle, and has strengthened oversight and engagement with state-owned enterprises (SOEs), particularly relating to capital spending. The Treasury expects to introduce dividend, loan, and guarantee policies in 2016-2017. Although new and untested as of yet, these policies should help the emirate's leadership identify, anticipate, and respond to fiscal risks in a timely manner. Real GDP growth has been revised down to 3.3% for 2014 and 1.3% in 2015 from 7.4% and 3%, respectively. The reasons for the revision are unclear but it may be related to weak re-export activity. We maintain our 2016-2018 GDP growth forecast at 4% (well above the 'A' median forecast of around 3%), given the methodological imperfections of the GDP series and the significantly more expansionary dynamics suggested by high-frequency indicators. The volumes of state-owned Stevin Rock, which exports rock aggregates and rock armour used in infrastructure projects across the region, grew 11% in 9M16. The number of guest-nights at hotels rose 15.8% in 9M16, after a 10% growth in 2015. The headline government debt ratio will fall to 17% of GDP in 2016 from 21.8% in 2015, well below the 'A' median of 52%. Longer-term debt dynamics are favourable, and the government intends to finance spending and debt repayments with internal resources in 2016-17, pending more clarity on developmental priorities in the new National Vision. Our debt numbers do not include debt of unlisted SOEs (7% of GDP, mostly guaranteed), but even including those liabilities general government debt would be well below the category median. Deposits are around 8% of GDP, and listed equity investments were around 16% of GDP in 1H16 (their value having fallen 33% from a peak in 2014). The government's biggest listed equity investment is a majority stake in the National Bank of Ras Al Khaimah (RAK Bank), which has debt of around 8% of GDP. We expect the government budget to post a surplus of 1.1% of GDP in 2016, after a balanced budget in 2015; the budget consolidates revenue and expenditure of SOEs (with the exception of RAK Bank), and we include net equity investments by SOEs in total expenditure. Revenue is growing strongly in most categories, particularly real estate and healthcare where our forecast was previously more conservative. Meanwhile, according to 1H16 outturns, capital spending will be below budget. Based on 1H16 outturns and 2015 budget performance, we maintain somewhat conservative forecasts for growth in revenue from free trade zones, real estate & healthcare, and oil & gas. There is potential for more non-SOE revenue after 2016, with the Department of Finance undertaking a study of government fees and levies, to be presented to leadership in early 2017. It is not yet clear how introduction of value added tax at the UAE level in 2018 could affect the Emirate's budget, if at all. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Ras Al Khaimah a score equivalent to a rating of 'BBB+' on the Long-Term Foreign Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows: - External finances: +1 notch, to reflect the benefits of Ras Al Khaimah's membership of the UAE federation. - Public finances: +1 notch, to reflect that a high share of foreign-currency debt is not a constraint on Ras Al Khaimah's fiscal financing flexibility, given that it has access to UAE Central Bank reserves on demand. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The factors that could, individually or collectively, lead to a positive rating action include: - Continued strengthening of the macroeconomic policy framework, for example through the availability and quality of economic data. - Sustained fiscal surpluses in an environment of strong, stable economic growth, leading to a continued improvement in the government's fiscal position. The factors that could, individually or collectively, lead to a negative rating action include: - A weakening in public finances, for example due to large, sustained increases in spending. - 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. - Fitch assumes that regional geopolitical conflicts will not directly impact Ras Al Khaimah or its ability to trade. Contact: Primary Analyst Krisjanis Krustins Associate Director +852 2263 9831 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analysts Toby Iles (Ras Al Khaimah) Director +852 2263 9832 Paul Gamble (Abu Dhabi) Senior Director +44 203 530 1623 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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