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Abu Dhabi, UAETuesday 11 December 2018

Moody’s affirms A3 rating and stable outlook for Sharjah

Government deficit set to drop to 2.3 per cent in 2017 on VAT, other revenue-raising measures

Humidity will rise at night. Antonie Robertson/The National
Humidity will rise at night. Antonie Robertson/The National

Moody’s Investors Service has affirmed Sharjah's long-term A3 issuer rating and stable outlook thanks to its resilient and diversified economy and the introduction of revenue-raising measures such as value-added tax (VAT) in 2018.

The UAE is introducing a five per cent value added tax on January 1 to offset dwindling government income from oil revenue. Moody's estimates that the impact of the revenue-raising measures in 2018 and 2019 is likely to hover around 6-9 per cent of 2016 revenues.

"These measures will help to diversify government revenues away from a narrow base reliant on customs duties and proceeds from land sales," the rating agency said. "They should also assist the

government's goal of reducing further its fiscal imbalance in the coming years."

VAT and other consumption taxes implemented across the UAE are set to diversify Sharjah’s government revenues away from predominantly customs duties and proceeds from land sales, and stabilise public debt levels. Moody's is forecasting the fiscal deficit will drop to 2.3 per cent in 2017 from 2.8 per cent in 2016.

Sharjah, the third largest emirate, is benefiting from its diversified economy that relies on its industrial base among other sectors which helps generate revenue.

Moody's is projecting GDP growth of 2.7 per cent in both 2018 and 2019 thanks to "more favourable economic conditions at the country level and from global trade."

Sharjah’s economy is relatively diversified for a small economy, with no single sector comprising more than a fifth of GDP. The manufacturing sector, for example, contributed 17 per cent of GDP in 2016, while reliance on th e oil sector is limited, "cushioning" the emirate from oil price gyrations.

The rating agency maintained the emirate's rating also partly thanks to "improved performance of key government-related issuers which has

lowered the risks posed by contingent liabilities to the government's balance sheet."

Government-related issuers, including the Sharjah Electricity and Water Authority, have had stable debt to GDP levels of about 10 per cent since 2014, the agency said.

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However, Sharjah still faces a challenge in addressing its fiscal imbalance, the report said . Debt accumulation has risen faster than government revenues in the past three years, leading to an increase in the debt-revenue ratio to 203 per cent in 2017, up from 142 per cent in 2014.

“Although indebtedness still compares favourably to similarly rated peers, failure to stabilise the debt burden close to 20 per cent of GDP could tilt the balance of rating pressure downwards across the course of the rating horizon,” the report said.

“Further weakening in debt and interest burden metrics would place the emirate’s fiscal strength closer to Baa1-rated peers.”