ABU DHABI MOVING FORWARD ON SOVEREIGN BOND ISSUE

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 001127 SIPDIS SIPDIS DEPT FOR NEA/ARP, EB/IFD/OMA TREASURY FOR DAS SAEED, ROSE NSC FOR NRAMCHAND E.O. 12958: DECL: 07/05/2017 TAGS: EFIN EINV AE SUBJECT: ABU DHABI MOVING FORWARD ON SOVEREIGN BOND ISSUE REF: ABU DHABI 467 Classified By: Classified by Ambassador Michele J. Sison for reasons 1.4 (b and d). ¶1. (C) Summary: Fitch and Standard & Poor's have both given the Emirate of Abu Dhabi the highest sovereign rating (AA) in the region. They have noted the emirate's strong financial situation, but have expressed concern about regional political risks and the general lack of fiscal transparency in Abu Dhabi. Abu Dhabi officials have told us that they are very happy with the ratings and plan to proceed with meeting investors regarding a planned bond issuance as early as the end of next week. The sovereign bond roll-out has been delayed by a few days based on the advice of Abu Dhabi's advisors that market conditions might not be optimal. The fact that Abu Dhabi has obtained a sovereign rating and plans to issue sovereign bonds is an important step toward transparency. Although Abu Dhabi has no need to borrow money, its actions should make it easier for its companies to borrow from the international capital markets. End Summary. Abu Dhabi Earns Highest Sovereign Rating in Region -------------- -------------- ¶2. (U) International rating agencies Fitch and Standard and Poor's both awarded the Emirate of Abu Dhabi an AA sovereign rating, which is the highest in the region. The rating is one step above that of Kuwait and Qatar. Both rating agencies considered it appropriate to issue the emirate a sovereign rating, despite the fact that the rating reflects an individual emirate rather than the country as a whole. Fitch's press release notes that Abu Dhabi generates over half of the UAE's GDP, funds over half of the federal budget (including direct funding of defense and security services), and that the ruler of Abu Dhabi has historically been the UAE's president. For these reasons, "Fitch regards it appropriate to treat Abu Dhabi as an essentially sovereign entity." ¶3. (U) Both rating agencies highlighted the emirate's role as an oil exporter and its substantial assets and current lack of foreign debt. Both agencies also noted regional political risk as weighing negatively on the rating. Fitch's press release mentioned problems with transparency and deficiencies in economic data. Fitch also noted that although the government and executive authority were not subject to the public and institutional checks and balances of most other sovereigns in the AA category, "the potential for misrule is constrained by respect for property rights, traditional codes of behavior and sensitivity to the welfare of emirate citizens..." Abu Dhabi Moving Forward on Bond Issuance -------------- ¶4. (C) Yousef al Otaiba, International Affairs Director for Abu Dhabi Crown Prince Mohammed bin Zayed, told Ambassador that the leadership was "very happy with the ratings from Fitch and S&P. Abu Dhabi Department of Finance Assistant Director for Government Accounts Salah Al-Waswasi, agreed, noting that Moody's, which had held its meetings one week after the other two rating agencies, was expected to issue its rating shortly. He speculated that the release of the prior ratings might put some pressure on Moody's, which already does an "unsolicited" rating on the UAE (though not Abu Dhabi Emirate). ¶5. (C) Al-Waswasi told econchief that Abu Dhabi Emirate would probably start its sovereign bond road show by the end of the week of July 8 in the U.S. The Department of Finance had originally planned its road show for the beginning of the week, but delayed a few days on the advice of its advisors (Deutsche Bank and Citibank). He also reiterated that Abu Dhabi has still not publicly announced that it plans to issue sovereign bonds. Rating Agencies Meet With Ambassador -------------- ¶6. (C) At the request of the Abu Dhabi Crown Prince's office, Ambassador, Econchief, and Treasury Regional Debt Advisor met with Fitch, Standard and Poor's, and Moody's in June to discuss economic and political issues that might have a bearing on their rating actions. The rating agencies agreed that Abu Dhabi's finances were very strong. They also expressed surprise at the level of access and disclosure that ABU DHABI 00001127 002 OF 002 they had been given. They all expressed some concern, however, with the general lack of transparency in Abu Dhabi's budget and were unsure how much they would be able to publish to justify their ratings. ¶7. (C) Fitch and S&P both sent ratings teams headed by Managing Directors. One S&P official noted that the mandate to rate Abu Dhabi was "very important" to S&P. Moody's, which already does an "unsolicited" rating of the UAE, sent a more junior team headed by its Vice President-Senior Analyst, Tristan Cooper, who covers the UAE. Cooper noted that Abu Dhabi could not have a higher sovereign rating than that of the UAE because that would imply that Abu Dhabi would allow the rest of the emirates or the federal government to default. (Note: Fitch's press release noted that it believed that Abu Dhabi would exercise discretion in meeting demands for assistance form other emirates and "treat its own obligations as senior and would not imperil its own financial and credit standing." End Note.) Dubai Has Not Asked For Rating -------------- ¶8. (C) Both S&P and Moody's analysts confirmed that the Emirate of Dubai had not approached them to conduct a rating assessment. Cooper opined that Dubai and the other emirates would receive a lower rating than Abu Dhabi. Comment -------------- ¶9. (C) Abu Dhabi's decision to obtain credit ratings and to issue sovereign bonds are important steps for the emirate. Rating agencies and investors are likely to push more transparency and information than the emirate has traditionally provided. Although we have not yet seen the ratings reports, we will be interested in seeing how much data was provided on Abu Dhabi's significant external assets and on its budget. A sovereign bond for the Emirate of Abu Dhabi should also help facilitate the efforts of its companies as they seek to borrow from international financial markets. Given the pace of development foreseen over the next few years, these companies will need to access these sources of funding. End Comment. SISON