The UAE is in a better position to absorb the hit to revenue from lower oil prices due to its diversified economy and large sovereign asset base, according to ratings agency Moody's.
The agency said the "deeper and longer-lasting shock" to global oil demand caused by the coronavirus pandemic meant it was lowering its oil price assumptions for Brent crude to $35 per barrel this year and $45 per barrel for 2021, which is about $8 per barrel lower than its last forecast in March. Its medium-term outlook for Brent was also lowered by $5 per barrel, to a range of $45-$65.
"The deeper global economic recession that we now expect in 2020 in all major advanced economies and the drastic reduction in travel in particular have reduced demand for oil products beyond our previous assumptions," said Alexander Perjessy, a senior analyst and vice-president at Moody's. "This lower-for-longer oil price environment will weaken all oil exporters' fiscal and external positions."
Governments across the world are facing widening budget deficits as they attempt to carry out fiscal and monetary stimulus to support economies that have been hit by the global pandemic amid declining revenues. For oil exporters, risks vary between countries considered relatively well-shielded – such as the UAE, Russia and Qatar as a result of their stronger asset bases and relatively well diversified economies –and those facing greater strain including Oman and Iraq, which face heightened liquidity pressures and have limited ability to embark on fiscal stimulus.
The liquid portion of sovereign assets significantly exceeds government debt in the UAE, Qatar, Azerbaijan and Kazakhstan, and covers nearly 100 per cent of government debt in Saudi Arabia, and more than 50 per cent of Russia's sovereign debt.
Moody's also affirmed the UAE's Aa2 credit rating and its stable outlook on Tuesday, stating that its sovereign rating includes an assumption of unconditional fiscal support from the government of Abu Dhabi, which is also Aa2-rated and benefits from a sizeable sovereign asset pool held by the Abu Dhabi Investment Authority.
"Superior infrastructure, very high per capita income and vast hydrocarbon reserves also support creditworthiness," Moody's said in a note. "In addition, the UAE's domestic politics have a track record of stability and the country has strong international relations."
The country's outlook also benefits from the stability of Abu Dhabi, as well as medium-term upside potential from its efforts to diversify the economy, with fiscal reliance on hydrocarbons comprising just 46 per cent of consolidated government revenue last year, according to Moody's estimates.
Although the coronavirus outbreak and the current glut in oil supply is likely to weaken revenues in the short term, "unless oil prices depart significantly and durably from our medium-term range, the credit implications of such changes in prices will be limited", the agency said.
