By Andy Sambidge
Fitch Ratings upbeat on emirate's finances as it affirms 'AA' rating with stable outlook
Foreign assets held by Abu Dhabi's sovereign wealth fund are estimated to be at least $300bn, making it the second strongest rated in the world after Kuwait, Fitch Ratings has said.
The rating agency said the emirate's $300bn assets compared to direct sovereign external debt of just $3bn after the maturing of a $1bn eurobond earlier this year.
The calculations come as Fitch affirmed Abu Dhabi's long-term foreign and local currency issuer default ratings at 'AA' with a stable outlook.
It added that the emirate's foreign assets are estimated to have risen again in 2011, despite a dip in investment returns, as the general government budget moved further into surplus, despite a substantial spending increase.
Sovereign net foreign assets held in Abu Dhabi total an estimated 131 percent of GDP at end-2011 and are second only to Kuwait's, Fitch said.
On current oil price assumptions - $110 in 2012, falling to $100 in 2013-2014 - gross assets are forecast to continue rising, despite a projected weakening in the overall fiscal surplus, Fitch added.
The rating agency said Abu Dhabi Investment Authority's (ADIA) average return in the 20 years to 2011 dropped slightly to 6.9 percent from 7.6 percent in the 20 years to 2010.
But it added that the emirate's overall fiscal surplus, including ADNOC dividends and ADIA investment income, improved sharply in 2011 despite an almost one-third rise in expenditure and net lending.
Exceptional support for developer Aldar accounted for one quarter of the total spending increase.
Fitch said a shock similar to 2008-9 - a sharp oil price fall coinciding with weak investment returns that causes revenues to fall and spending to increase - remained the main threat to Abu Dhabi's 'AA' rating.
"Sustained double-digit growth in spending, well above Fitch's expectations, could see budget deficits recur more frequently and would leave the sovereign credit profile more exposed to this kind of shock and thus could exert downwards pressure on the ratings," it said.
However, spending in 2012 is budgeted to rise only slowly and Fitch estimated that the breakeven oil price will rise to $70 from $60 last year.
With public spending a key driver of the non-oil economy, non-oil real GDP growth will likely slow from the five percent average estimated for 2009-2011, Fitch added.
"Financial and oil wealth offset weaknesses such as high economic and fiscal dependence on oil, limited transparency and weak data provision compared with most other 'AA'-rated sovereigns," the rating agency noted.
The biggest downside risk to the ratings, other than balance sheet deterioration, would be a major geopolitical event, Fitch added.