Fitch Ratings has affirmed the United Arab Emirates’ long-term foreign-currency issuer default rating at AA- with a stable outlook. Earlier this week, the agency also confirmed Abu Dhabi’s rating at AA, maintaining a stable outlook for the emirate as well.

The AA- rating is reflective of the UAE’s moderate consolidated government debt, strong net external asset position, and high GDP per capita. Additionally, the nation benefits from Abu Dhabi’s sovereign net foreign assets, which rank among the highest of all Fitch-rated sovereigns.

However, these strengths are countered by certain challenges, including weak governance indicators compared to its peers, a high reliance on hydrocarbon income, and significant leverage among government-related entities. The AA- rating is also applicable to the federal government.

Fitch Ratings emphasized that the UAE’s strong position and positive outlook stem from several key factors, particularly the country’s budget surplus. The agency estimates that the consolidated budget will remain in surplus in 2024, projecting a surplus of 7.1 percent of GDP, down from 8.6 percent in 2023. This includes surpluses in both Abu Dhabi and Dubai, while Ras Al Khaimah and Sharjah are expected to face budget deficits.

The outlook for the UAE is stable, supported by moderate consolidated government debt, which Fitch estimates will stand at 24.9 percent of GDP by the end of 2024. This figure is significantly lower than the median of 48 percent for the ‘AA’ category. The debt is anticipated to rise slightly to 25.4 percent in 2025 and 2026.

Different emirates display varied debt profiles, with Sharjah exhibiting a higher debt burden. Fitch projects that Abu Dhabi will see an increase in its debt as it begins issuing in local currency, while Sharjah will need to borrow to address deficits. Conversely, Dubai’s debt is expected to continue to decrease. The agency noted that if oil prices fall, Abu Dhabi might initially prefer to increase borrowing rather than heavily draw from the Abu Dhabi Investment Authority, although the emirate has internal borrowing limits.

Despite a moderate government debt-to-GDP ratio, Fitch Ratings considers the UAE to have high leverage within its economy. It estimates that overall contingent liabilities from government-related entities (GREs) of the emirates and the federal government will reach about 62 percent of the UAE’s GDP in 2023. While a significant portion of state-owned enterprise debt is associated with healthy entities that pose little risk, many of these entities do not publicly disclose their financial data.

Fitch Ratings also points out that regional geopolitical tensions pose a risk to Abu Dhabi’s hydrocarbon infrastructure. The agency believes that the current escalation cycle is highly uncertain, but it anticipates that the regional conflict will remain contained and will not last for an extended period. A broader regional conflict could threaten Abu Dhabi’s oil infrastructure and impact Dubai’s role as a trade, tourism, and financial hub.

The agency asserts that Gulf maritime trade is a critical interest for the UAE, and it estimates that the country’s ratings could withstand some short-term disruptions, given its substantial fiscal and external buffers.

Looking ahead, Fitch Ratings projects that the UAE’s GDP will grow by 5.2 percent in 2025, driven by a 9 percent increase in oil production in Abu Dhabi, which is expected to align closely with OPEC+ production quotas. Abu Dhabi’s ADNOC has reported a production capacity of 4.85 million barrels per day, exceeding Fitch’s forecast of 3.18 million barrels per day for 2025.

Additionally, robust non-oil growth is anticipated to exceed 4 percent in 2025, despite global challenges, fueled by construction, government investments, and a growing population. Nonetheless, risks are increasing due to the potential regional impact of declining oil prices and uncertainties in global growth.