(MENAFN- Arab Times) On Nov 22, 2013, Standard & Poor's Ratings Services affirmed its 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings on the Emirate of Ras Al Khaimah. The outlook is stable. The affirmation reflects our view of Ras Al Khaimah's limited fiscal risks due to the government's minimal spending responsibilities, its strong government balance sheet, and ongoing indirect financial support from the UAE. We also believe that, under certain circumstances, Ras Al Khaimah would receive extraordinary financial support from the UAE, although we do not anticipate that the need will arise. Ras Al Khaimah also has a comparatively wealthy and increasingly diversified economy based on a strong manufacturing sector.
Risks
Similar to other Gulf Cooperation Council (GCC) states, the ratings are constrained by under-developed political institutions and geopolitical risks. In our view, the availability and timeliness of economic and demographic data, including national income and external accounts, is among the weakest of the sovereigns we rate, which is a ratings constraint. 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. The UAE federal government, funded mostly by Abu Dhabi, meets most of the operating expenditure costs of the seven emirates that comprise the UAE.
These costs include health care, education, energy provision, 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.
We view Ras Al Khaimah's external risk as limited 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 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 2013-2016.
Position
We estimate Ras Al Khaimah's net general government asset position at about 4% of GDP in 2013-2016, 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 stable outlook balances our view of the government's fiscal flexibility and the advantages of UAE membership against its underdeveloped and highly centralized political institutions and the limited availability of timely economic data. We expect continued support for Ras Al Khaimah through the system of fiscal federalism within 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, the transparency and strength of political institutions were to significantly improve.
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