(The following statement was released by the rating agency)
Jan 15 -
Summary analysis -- Ras Al Khaimah (Emirate of) ------------------- 15-Jan-2013
CREDIT RATING: A/Stable/A-1 Country: United Arab
Primary SIC: Sovereign
Credit Rating History:
Local currency Foreign currency
23-Jan-2008 A/A-1 A/A-1
The ratings on the Emirate of Ras Al Khaimah, the northernmost of the seven emirates that comprise the United Arab Emirates (UAE), reflect our view of limited fiscal risks in Ras Al Khaimah due to the government’s minimal expenditure responsibilities, prudent fiscal policy, and ongoing indirect financial support from the UAE. Ras Al Khaimah also has a comparatively wealthy and increasingly diversified economy. Similar to other GCC states, the ratings are constrained by under-developed political institutions, limited transparency with regard to economic data, and geopolitical risks. While data on Ras Al Khaimah’s balance of payments and external position is not available, we view the UAE’s extremely strong net external asset position as a support, with the UAE likely to provide assistance to Ras Al Khaimah in the event of financial distress.
The federal government, funded mostly by Abu Dhabi (AA/Stable/A-1+), meets most of the operating expenditure costs of the seven emirates that make up the UAE. These include health care, education, energy provision, interior ministry outlays, and defense. Major capital costs--such as the development of schools, hospitals, trunk roads, and the provision of adequate energy generation and distribution--are also borne at the federal level. Individual emirates, including Ras Al Khaimah, have limited fiscal obligations--primarily related to local infrastructure and services, and capital spending to develop emirate-level projects--and consequently low fiscal risks.
Ras Al Khaimah’s external risk is covered, in our view, by the UAE’s extremely strong external balances combined with its system of fiscal transfers and banking coordination. Ras Al Khaimah’s sole domestically controlled bank--RAK Bank--sits within the supervisory remit of the central bank of UAE. In our view, the confluence of the UAE’s monetary and banking union limits the external risks of the smaller emirates and would provide a cushion in the event of an external shock. We expect the UAE’s current account to show an overall surplus of almost 10% of GDP in 2012, similar to 2011.
Ras Al Khaimah is part of a UAE-wide monetary union. The UAE dirham has effectively been pegged to the U.S. dollar since 1980. Hence, we assess the monetary conditions prevalent in the UAE as a whole in our credit analysis of Ras Al Khaimah and other emirates. Notwithstanding the stability provided by the exchange rate arrangement, we view monetary policy as lacking independence, with interest rates broadly following the U.S. policy rate.
We estimate Ras Al Khaimah’s net general government asset position at about 5% of GDP in 2013, including the debt and liquid assets of all publicly owned entities. We believe that membership of the UAE benefits Ras Al Khaimah’s economic and political stability, and that the UAE would provide external support in times of political, economic, or financial stress. The financial capacity of the UAE and the larger emirates, in particular Abu Dhabi, would, in our view, be ample to cover Ras Al Khaimah’s modest liabilities.
The availability and quality of official economic data on Ras Al Khaimah, including national income and external accounts, is limited and effectively a ratings constraint.
The stable outlook balances our view of the government’s fiscal flexibility and the advantages provided by UAE membership against its under-developed political institutions and the relatively limited availability of key economic data. We expect continued support from the UAE and assess as strong the likelihood of extraordinary support from the federation (backed by Abu Dhabi) in the event of financial distress.
We could consider lowering the ratings if there were a significant deterioration in Ras Al Khaimah’s economic or fiscal performance.
We could raise the ratings if, against our current expectations, transparency and the strength of political institutions were to significantly improve.
Related Criteria And Research
-- Banking Industry Country Risk Assessment: United Arab Emirates, Dec. 19, 2012
-- Sovereign Government Ratings Methodology Addendum For Sovereigns With Limited External Data, Nov. 7, 2011
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009