Fitch affirms Ras Al Khaimah at 'A'

Fitch Ratings-Hong Kong: Fitch Ratings has affirmed Ras Al Khaimah's (RAK) Long-Term Foreign-Currency Issuer Default Rating (IDR) 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 are supported by the benefits of RAK's membership of the UAE, a low and declining government debt burden and high GDP per capita. The emirate's small size and weaknesses in the policy framework, including the poor availability of economic data, weigh on the ratings.

The emirate derives substantial support from its membership of the UAE. It shares the UAE monetary and exchange rate system of a credible US dollar peg and absence of exchange controls. The emirate benefits from its access to the UAE's 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 some of the spending needs of a typical sovereign. Close integration within the UAE has allowed the emirate to focus on its development strategy and build a relatively diversified economy dominated by manufacturing and services.

We expect the debt of the government and its state-owned enterprises (SOEs) to fall to below 20% of GDP in 2019 from 33% in 2015. It will fall further to close to 17% of GDP in 2020 as the government uses VAT receipts for the early repayment of AED678 million of private placements. The debt/GDP ratio is well below the 'A' category median. The debt/revenue ratio, at 99%, will also be lower than for most sovereigns in the 'A' category. We include most SOE debt in headline government debt, as they are part of the budget framework, most of their debt is fully guaranteed, and their profits form an important part of government revenue. Government debt excluding SOEs will reduce slightly to 11% of GDP at end-2019, while government/SOE cash deposits will be around 10.6% of GDP, and listed domestic equity investments will be around 11% of GDP.

The government's fiscal surplus increased to 2.6% of GDP in 2018, from 1.4% in 2017, buoyed by the recovery of mining and quarrying activities and receipts from the sale of the government's 41% stake in Union Cement Company. The budget consolidates revenue and expenditure of most unlisted SOEs, and we include capital contributions to non-consolidated SOEs net of repayments in total expenditure. Revenue also includes dividends from listed companies (notably RAK Bank). The 2018 outturn adds to the emirate's track record of fiscal surpluses, which have averaged 1.6% over 2014-2018. 

Fitch forecasts a fiscal surplus of 2.7% of GDP in 2019, largely underpinned by RAK's receipt of close to two years' worth of VAT, amounting to over 2% of GDP. VAT was introduced in the UAE in 2018 and collected at the federal level, but an agreement on the share to be remitted to individual emirates was only reached in early 2019, which delayed the disbursement of the first year's collection. We expect dividends from SOEs and listed companies to fall to 1.6% of GDP from 2.3% in 2018. Further expansion of capital spending and the wage bill as well as changes in working capital will match revenue growth, principally reflecting SOEs' growth and the inclusion of additional entities within the consolidated government perimeter following a re-evaluation. 

GDP growth will slow slightly to 2.5% in 2019 from 2.8% in 2018 as the momentum from the rebound after the Qatar embargo fades and UAE-wide growth is expected to remain muted. The current pipeline of UAE projects, Abu Dhabi's AED50 billion (4% of UAE non-oil GDP) stimulus package announced in 2018 and the diversification of export markets will support mining and quarrying activity, which recorded growing profits in January-April 19. The development of RAK's container port could also spur new investment in the free zones and the broader economy. 

However, the continuation of the housing market slump in Dubai has led to a reduction in building permits and mortgages issued in RAK and could also weigh on tourism. 1H19 outturns show decreasing hotel occupancy rates, although they remain high. The government is making progress on developing the emirate as a tourist destination, and a doubling of hotel capacity by 2023 is in the pipeline. A further escalation of tensions between Iran and the US and its regional allies could also have repercussions for RAK.

The authorities are continuing to improve data collection, budgeting, and financial planning and control, in an effort to use fiscal resources more efficiently. The government expects to introduce a new policy governing liquidity management, following recent policies for SOE debt and loan guarantees. 

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 (LT FC) IDR scale. 

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LTFC 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, which contributes negatively to RAK's score in the SRM, 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, integration within a larger economy and financial system, and the potential for extraordinary financial support.

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 LT FC 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.

ESG CONSIDERATIONS
Ras Al Khaimah has an ESG Relevance Score of 4 for Human rights and political freedom as Ras Al Khaimah (UAE) scores worse than peers in the Voice and Accountability pillar of the World Bank Governance Indicators which is relevant to the rating and a rating driver captured in Fitch's SRM.

Ras Al Khaimah has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.

Ras Al Khaimah has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.

Ras Al Khaimah has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and a rating driver for Ras Al Khaimah, as for all sovereigns.

RATING SENSITIVITIES
The factors that could, individually or collectively, lead to positive rating action include:

- Strong, sustained economic growth, backed by more credible economic data and accompanied by other improvements to the policy framework;

- Sustained fiscal surpluses leading to a 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 negative rating action include:

- A weakening in public finances, for example due to large, sustained increases in spending;
- 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.

- In the event of need, support for the banks would come primarily from the UAE federal authorities. 

DATA LIMITATIONS
Although being addressed by the authorities, data weaknesses still hamper analysis and comparison with peers. National accounts data are limited and not yet methodologically mature, resulting in frequent revisions. High-frequency data are also absent, although the economy can be tracked by looking at the performance of the government's enterprises.

Monetary and balance-of-payments data are compiled at the UAE level only and are of weaker quality than for peers, with no international investment position data. However, the emirate derives substantial support from its membership of the UAE federation. RAK shares the UAE monetary and exchange-rate system with a credible US dollar peg and absence
of exchange controls. Thus, the emirate individually has no need for foreign exchange reserves and its rating is not constrained by external factors, compensating for the lack of external sector data.

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+'.
Issue ratings on RAK Capital's senior-unsecured foreign-currency bonds affirmed at 'A'

© Press Release 2019