Emirates’ sovereign rating safe, says Moody’s
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Moody’s rating agency has concluded that the sovereign ratings of Abu Dhabi and the other Arab Emirates are safe regardless of the debt problems of state-owned firm Dubai World.
The markets of both Abu Dhabi and Dubai plummeted this morning after both sovereignties’ markets returned from a religious break. But Moody’s says the UAE’s rating of AA2 is stable.
Last week Dubai World, a state-owned firm that incorporates much of Dubai’s property and import businesses, revealed that it was unable to repay on £3.18bn bonds. This has led to much speculation on the future of the Emirates as a financial hub, but Moody’s head analyst for Middle East sovereigns Tristan Cooper says the offshore oil assets of Abu Dhabi, held by the Abu Dhabi Investment Authority are keeping the entire United Arab Emirates safe.
He says: “The recently announced restructuring of Dubai World’s liabilities is unlikely to threaten the credit quality of the government of Abu Dhabi and the federal government of the United Arab Emirates.”
“Abu Dhabi will probably bail out the Dubai sovereign should it come to that - as well it may. They are, after all, family, and it would give Abu Dhabi major leverage over its reckless cousin”
Willem Buiter
Cooper says that the adverse impact of a Dubai World restructuring on the non-hydrocarbon sectors of the domestic economy could potentially be severe, especially in Dubai. However, he says: “Overall macro-economic stability is protected by the country’s strong net external creditor position that is bolstered by Abu Dhabi’s accumulated oil wealth.”
The ratings agency notes that the Dubai World restructuring has effectively reduced the UAE government’s contingent liabilities by highlighting the limits of government support for indebted state-owned companies.
In his blog for the Financial Times, Professor of European political economy at the London School of Economics and Political Science and former external member of the Monetary Policy Committee Willem Buiter agrees that the failure of Dubai World will have no affect on the UAE.
In his Maverecon post, he says: “The Abu Dhabi sovereign is under no legal or moral obligation to bail out private companies in Dubai or anywhere else, including Dubai World.
“I don’t see any commercial case for the Abu Dhabi sovereign to bail out Dubai World. Indeed, it would be much more attractive for the Abu Dhabi authorities to have Dubai World go into receivership and to cherry pick the good assets at liquidation prices. Abu Dhabi will probably bail out the Dubai sovereign should it come to that - as well it may. They are, after all, family, and it would give Abu Dhabi major leverage over its reckless cousin.”
Buiter also alludes to Moody’s note and predicts that future investment in Dubai’s firms will be less attractive because the default of Dubai World has shown investors that the UAE sovereign will not bail out its own companies, thus stripping them of their former perceived sovereign status.
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