Fitch Ratings has affirmed Ras Al Khaimah’s (RAK) long-term foreign and local currency issuer default ratings (IDRs) at A with a stable outlook. The short-term IDR is also affirmed at ‘F1’. The Country Ceiling is ‘AA+’, equal to that of United Arab Emirates (UAE) of which RAK is a member.
The ratings balance the benefits of RAK’s membership of the UAE and its low debt and strong fiscal current surplus against weaknesses in the macro policy environment and in data quality.
“RAK benefits from the UAE’s highly rated operating and external environment (Country Ceiling ‘AA+’, supported by Abu Dhabi’s (‘AA’/Stable) oil income and wealth). External finances do not constrain RAK’s rating at the current level. Potential exceptional support from the Federal Government (FG), were it to be needed, is not factored into the rating,” Fitch Ratings in a statement said.
“The government is small (revenue less than 20% of GDP). Most basic public services and infrastructure are provided directly by the FG, relieving RAK from many of the obligations of a normal sovereign.
“Gross debt ratios are significantly lower than ‘A’ category medians. Gross debt rose slightly in 2012 but at 23.7% of GDP is less than half the current peer group median. On current borrowing plans, debt could fall below 20% of GDP in 2014. In the absence of a developed local capital market, debt is mostly (85%) foreign currency and externally issued.
“RAK runs a current budget surplus (excluding capex and financial investments). It was 6.5% of GDP in 2012, equal to the decade average. Planned investment can be financed without incurring deficits or net new debt.
“Debt management has improved and debt has fallen since 2009, when a heavy investment programme as well as support for SOEs in the wake of the Dubai crisis caused debt to peak at 31% of GDP. Debt is now largely centralised and the government compiles quarterly financial statements for the overall public sector. Although sovereigns usually report at the central or general government level, for RAK, where SOE revenues and performance are crucial to fiscal and economic development, this provides assurance that SOEs are well managed and will not over borrow.
“Reliance on revenue from fee and lease income means revenue can be highly volatile. SOEs contribute almost 60% of budget revenue, although their activities are diversified.
“GDP growth is estimated to exceed ‘A’ category peers. However, national accounts data are weak and lack of other high frequency data make tracking the economy difficult. The government is devoting more resources to data provision, but is hampered to some extent by weaknesses at the FG level.
“Monetary policy is a federal responsibility. The long-standing peg to the USD has brought stability, but real interest rates have been negative for a prolonged period and have at times fuelled speculative activity. Inflation is generally higher and more volatile than peers.
“Like other sovereigns in the region, voice and accountability and institutional checks on the executive are weak compared to peers. However, a newly created Executive Council will help institutionalise decision making and reduce reliance on individuals.”