Moody's affirms UAE's Aa2 rating citing strong economic diversification momentum

Moody's Ratings has affirmed the United Arab Emirates' Aa2 long-term local and foreign currency issuer ratings, noting that the country's outlook remains stable. The agency also affirmed the foreign currency senior unsecured debt and MTN program ratings at Aa2 and (P)Aa2, respectively, indicating continued confidence in the UAE's creditworthiness.

In its latest report, Moody's stated, "The affirmation reflects our expectation that the federal government's debt burden will remain very low, underpinned by its long-standing commitment to balanced budgets and limited spending needs as a result of fiscal decentralization." Moody's noted that the UAE's ratings take into account the strong support from the government of Abu Dhabi, which plays a key role in the UAE federation, ensuring financial stability.

Moody's added, "We expect the UAE's credit profile to continue to benefit from Abu Dhabi's very strong balance sheet, which will support the country's ability to withstand shocks." Moody's also mentioned the UAE's high priority on expanding non-oil revenue sources, promoting the development of the non-oil sector, and enhancing the UAE's attractiveness to foreign investment and talent, thereby diversifying its economic base.

This increases the likelihood that the government's indirect exposure to oil price volatility and long-term carbon transition risks will decline, and potentially faster and more significantly than Moody's currently expects, thereby enhancing the UAE's overall credit profile. In 2024, hydrocarbons accounted for approximately 22% of the UAE's total GDP and 25% of total exports of goods and services, indicating a notable reliance on the energy sector.

While the federal government does not directly collect hydrocarbon revenues, it relies on revenue contributions from the government of Abu Dhabi, as well as other off-budget spending and support, with approximately 80% of Abu Dhabi's fiscal revenue derived from oil and gas. Moody's added that the impact of hydrocarbon exposure has been mitigated to some extent by the UAE's strong economic diversification momentum since 2020, showcasing a shift towards a more balanced economy.

During the period of 2021-2024, strong non-oil growth averaged 6.3%, benefiting from structural reforms that have continued to enhance the UAE's attractiveness as a preferred destination for foreign investment in the region over the past few years. The UAE's real GDP achieved a notable growth of 3.8% in the first nine months of 2024, reaching AED 1.322 trillion, driven by expansion in the non-oil sector.

The contribution of non-oil activities to real GDP reached 74.6%, highlighting the increasing role of these sectors in supporting economic growth, while oil-related activities contributed 25.4%. Among the economic activities contributing the most to the UAE's non-oil GDP, the trade sector ranked first, contributing 16.5%, demonstrating its significance in the country's diversified economy.

Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, stated in February that the UAE's comprehensive economic partnership agreements with various countries contributed AED 135 billion to the country's non-oil trade, an increase of 42% year-on-year. Moody's also noted that the UAE faces some adverse credit risks, including its exposure to regional geopolitical tensions that could disrupt the strong diversification momentum of the economy and affect its long-term growth prospects.

Moody's stated, "An escalation of third-party tensions into military conflict could disrupt the UAE's ability to produce and export oil, including via the Strait of Hormuz, while increasing perceptions of regional risk and instability, which could undermine its long-term economic diversification prospects." However, Abu Dhabi's vast government financial assets mitigate geopolitical risks to some extent, supporting the government's ability to cope with shocks.

The UAE can also transport a large portion of its oil exports via the Habshan-Fujairah pipeline, bypassing the Strait of Hormuz. Similarly, it can utilize the recently completed freight rail network connecting Abu Dhabi and Fujairah to transport other goods, providing alternative routes for trade and reducing reliance on potentially vulnerable waterways.