Financial planning and control is being standardised across government departments and the government’s consolidated entities. A new financial planning framework was put into place to standardise budgeting approaches.
F itch Ratings-Hong Kong-04 May 2016: Fitch Ratings has affirmed Ras al Khaimah’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘A’ with Stable Outlook. The issue ratings on RAK Capital’s senior unsecured foreign currency bonds have also been affirmed at ‘A’. The Short-Term Foreign Currency IDR has been affirmed at ‘F1’. The United Arab Emirates (UAE) Country Ceiling has been affirmed at ‘AA+’; this Ceiling applies to Ras al Khaimah and Abu Dhabi.
KEY RATING DRIVERS
The ratings balance the benefits of Ras al Khaimah’s membership of the UAE, a low debt/GDP ratio and solid fiscal performance against lingering weaknesses in data quality and the macro policy framework.
The Emirate derives substantial support from its membership of the UAE federation. Ras al Khaimah shares the UAE monetary and exchange-rate system with a credible US dollar peg and absence of exchange controls. The Emirate has no need for its own foreign exchange reserves, and UAE support compensates for the lack of external sector data. Most basic public services and infrastructure are provided directly by the federal government, relieving the Emirate’s budget of many of the spending obligations of a typical sovereign.
The authorities’ ability to monitor and manage the economy is still limited by data weaknesses and by the lack of institutional structures enjoyed by other sovereigns in the peer group. National accounts data are limited and not yet methodologically mature, resulting in frequent revisions, and inter-year data are also absent.
These weaknesses are being addressed through ongoing reforms and improvements, but there are risks to the pace of progress. A population census in late 2015 has resulted in a revised population estimate of 345,000 people as of 2015, down about 100,000 from previous estimates based on data provided by the UAE National Bureau of Statistics. Another upward revision to GDP is set to take place after the 2015 GDP figure is finalised, and publication of quarterly GDP data could follow in late 2016 after delays resulting from the introduction of the UAE Federal Competitiveness and Statistics Authority. Dedicated institutional statistics capacity is being put into place.
Financial planning and control is being standardised across government departments and the government’s consolidated entities. A new financial planning framework was put into place to standardise budgeting approaches. The Financial Planning and Analysis Division began quarterly monitoring of entity and departmental spending in 1Q16. The Treasury is putting in place a process for the approval and monitoring of government guarantees, and a process is already in place to scrutinise the economic feasibility of new guarantee requests. A dividend policy is
in the works.
The headline government debt ratio will fall to 16.6% in 2016 from 21.9% in 2015, as no new debt is incurred and a USD400m Sukuk was repaid using proceeds from an issue in 2015. This is well below the peer median of 44.1% of GDP. Fitch expects debt to fall further in 2017 and beyond. Our headline debt figure does not include debt of government-owned companies (most of it guaranteed), which we expect to fall to 6.9% of GDP in 2016. Fitch expects cash deposits across the government and its entities to fall to 4.9% of GDP. The value of the government’s listed domestic equity investments was around 19% of GDP at end-2015. These investments can be volatile, as evidenced by the 22% valuation loss they saw in 2015.
Fitch projects a budget deficit of 1.4% of GDP in 2016 (including net equity investments in expenditure), versus a surplus of 0.3% in 2015. The government does not include net equity investments in expenditure when reporting the budget balance and on that basis, Fitch’s projection implies a surplus of 0.1% of GDP, less than the government’s budgeted surplus of 1.2%. More conservative revenue projections account for the difference. Fitch expects smaller increases in revenue in free trade zones, real estate and healthcare, following lower-than-budgeted revenue in these categories in 2015. Fitch also believes that expected increases in hotel capacity, occupancy, and room rates imply a smaller-than-budgeted increase in tourism revenues.
Spending including net equity investments will rise 33% (in line with the budget), primarily on the back of capital spending projects carried over from 2015 that were delayed by the introduction of new approval procedures. Key capital spending items include a new crusher for Stevin Rock and RAK Rock, the expansion of Saqr port, restoration of a hotel property, a multitude of enabling infrastructure investments in the RAKIA Free Trade Zone and investment in a community development on Al Marjan Island.
Ras al Khaimah does not export oil, but as a major exporter of construction materials to the GCC, it is indirectly affected by lower oil prices through a reduction of construction spending in the region. This risk is somewhat mitigated by a small direct exposure to Saudi Arabia, which has seen the biggest cut-backs in construction spending; other GCC states have maintained it or have only cut back gradually. Ras al Khaimah also has the potential to redirect exports to other markets, as it did in 2009-2010.
We estimate real GDP growth to have slowed to 3% in 2015, after 7.4% in 2014. We expect 4% growth per year in 2016 and 2017, driven by tourism, the export of construction materials, and activity within the Free Trade Zones. Saqr port tonnage rose 4.8%, reflecting mostly exports of construction aggregates; the new rock crusher and an expansion of Saqr port in 2017 could drive further growth. The number of guest-nights at hotels grew 10% in 2015, with strong growth in visitor numbers from Germany and China compensating for the negative impact of dollar strength and weakness in the Russian market. Hotel capacity is set to increase 50% over the next three years, and a key challenge will be to develop Ras al Khaimah as a destination to capitalise on the planned new capacity.