August 21, 2017 / 2:51 PM / 3 months ago

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

(The following statement was released by the rating agency) HONG KONG, August 21 (Fitch) Fitch Ratings has affirmed Ras Al Khaimah's (RAK) Long-Term Issuer Default Ratings (IDRs) at 'A' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The ratings reflect the benefits of RAK's membership of the UAE, a low government debt burden, high GDP per capita and governance indicators that are close to the 'A' median. These strengths are balanced against the emirate's small size and weaknesses in the policy framework, including the poor availability of economic data. 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 RAK's spending more flexible than peers' and relieving the emirate of the obligations of a typical sovereign. Close integration in the UAE economy has allowed the emirate to focus on its development strategy and build a reasonably diversified economy dominated by manufacturing and services. We expect the debt of the government and its trading entities (SOEs) to fall to around 24% of GDP in 2017 from 32% of GDP in 2015. This is well below the 'A' median of 48% of GDP. The debt/revenue ratio, at 142%, is in line with the median. We now include most SOE debt in headline government debt, as SOEs are part of the budget framework, almost all of their debt is fully guaranteed and their profits form an important part of government revenue. Government debt, excluding SOEs, is around 16% of GDP. Government and SOE cash deposits as of end-1Q17 were over 9% of GDP (or USD1 billion), and listed equity investments were around 14% of GDP (the investments' value having fallen 38% from their peak in 2014). The government posted a surplus of 3.6% 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 grew strongly in most categories, particularly real estate and healthcare. Meanwhile, spending grew but was below budget in all major categories. The 2016 outturn adds to the emirate's recent track record of prudent fiscal management. The fiscal surplus averaged 1.6% of GDP in 2010-2016. We expect that the budget will post a deficit of 0.7% of GDP in 2017, before returning to surplus in 2018-2019. Revenue in 2017 will essentially be flat in nominal terms, while spending will grow nearly 30%. Dividends from RAK Bank are budgeted to be lower this year. Relative to the government's budget, we factor in some weakness in revenue from ports and quarries, reflecting capacity constraints and a temporary hit from the UAE's trade sanctions against Qatar. We also expect lower-than-budgeted revenue from real estate and healthcare, taking into account past budget performance. Spending will be higher on account of working capital build-up in SOEs, a growing wage bill reflecting SOE expansion and build-up of institutional capacity, as well as capital spending. We expect that real GDP growth will slow to 3.6% in 2017 from 4.6% in 2016, factoring in the impact of the sanctions that the UAE imposed on Qatar in June 2017. We expect that this will lead to a temporary drop in the exports from state-owned quarries Stevin Rock and Rak Rock, which make up around 4% of RAK's GDP and used to export 12% of their production to Qatar. The suspension of Qatar Airways' flights to RAK Airport could slow the growth of visitors. A perception of heightened political risk could hurt trade, tourism and economic sentiment throughout the GCC region. GDP growth should pick up in 2018 and 2019. Completion of the first of two deep-water berths at Saqr Port in 2018 will ease the bottleneck at quarries and allow them to export to more distant markets. New investments in the broader economy and particularly the free trade zones could be spurred by the development of RAK's container port. A 40% expansion of hotel capacity is in the pipeline for 2018-2019 on the back of rapid growth in visitor numbers and high occupancy in recent years; the additional capacity will help RAK benefit from the higher visitor numbers expected around Dubai's Expo 2020, while promoting its own offering. The authorities are continuing to improve financial planning, budgeting and data collection. They have begun budgeting over a three-year horizon, introduced quarterly performance evaluation across the public sector and strengthened oversight and engagement with SOEs. New dividend, loan and guarantee policies will allow the emirate to more efficiently use its fiscal resources. The launch of the new Statistics & Studies Center in early 2017 should improve the quality of economic information available and allow the authorities to better track the economy and plan their development programme in the medium term. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns RAK 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: - Public finances: +1 notch, to reflect that a high share of foreign-currency debt is not a constraint on RAK's fiscal financing flexibility. - External finances: +1 notch, to reflect the benefits of RAK's membership of the UAE federation, including access to UAE foreign exchange reserves and integration in a larger economy and financial system. 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: - Strong, sustained economic growth, accompanied by improvements to the policy framework, including the quality and availability of data; - Sustained fiscal surpluses leading to continued decline in public sector debt and a build-up of fiscal buffers, particularly if accompanied by evidence of the government's commitment to a medium-term fiscal framework. 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 medium-term 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 RAK or its ability to trade. - In the event of need, support for the banks would come primarily from the UAE federal authorities. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1' Short-Term Local-Currency IDR affirmed at 'F1' Country Ceiling affirmed at 'AA+'. This applies to both RAK and Abu Dhabi. Issue ratings on RAK Capital's senior-unsecured foreign-currency bonds affirmed at 'A' 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 Analyst Toby Iles Director +852 2263 9832 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 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. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Sukuk Rating Criteria (pub. 14 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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