Moody's changes Sharjah's rating outlook to negative, affirms A3 rating

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1. 7 /19/2019 about:blank Rating Action: Moody's changes Sharjah's rating outlook to negative, affirms A3 rating 18 Jul 2019 New York, July 18, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Sharjah's longterm issuer ratings to negative from stable and affirmed the long-term issuer ratings at A3. The negative outlook reflects the government's deteriorating fiscal position which, in the absence of significant fiscal consolidation measures, would point to credit metrics consistent with a lower rating. The A3 rating continues to be supported by a reasonably well diversified economy, relatively high income levels, low non-financial public sector debt, and its membership within the federal structure of the United Arab Emirates (Aa2 stable). The affirmation of the A3 rating also applies to the senior unsecured debt ratings of Sharjah Sukuk Limited, Sharjah Sukuk (2) Limited and Sharjah Sukuk Programme Limited. The (P)A3 senior unsecured MTN programme of Sharjah Sukuk Programme Limited was also affirmed. In Moody's opinion, the payment obligations of the notes issued by these entities are direct obligations of the government and ranked pari passu with other senior, unsecured debt issuances of the government. RATINGS RATIONALE RATIONALE FOR THE NEGATIVE OUTLOOK The negative outlook reflects the government's deteriorating fiscal position which Moody's expects to continue unless significant consolidation measures are taken. Spending increases have outweighed revenues, resulting in the further accumulation of government debt. Debt-to-GDP increased to 25.4% in 2018 from 19.5% in 2017, now more than twice the level when the sovereign rating was first assigned in 2014. Meanwhile, debt-to-revenues rose to 246% in 2018 from 209% in 2017, which is significantly higher than the A-rated median. While the revenue from the newly-introduced VAT will lower this ratio in 2019, Moody's expects the debt burden to rise again from next year. New revenue raising measures introduced in 2018 had mixed outcomes. The government's main own-source revenue measure introduced last year -- an increase to road tolling rates for heavy vehicles -- did not raise as much additional revenue as the government expected. By contrast, the AED1.6 billion share of federal-collected VAT revenues allocated to Sharjah was significantly higher than the government initially anticipated, although the disbursal of these receipts from the federal government was delayed until the first half of 2019. The revenue shortfall for 2018 was only partially offset by an acceleration of the 2019 budget contribution from Sharjah Electricity and Water Authority. Meanwhile, the government's existing revenue streams continued to be volatile. All in all, while growth in revenues was below the government's expectations, expenditure exceeded the budget by 9.3% and overall was 24% higher than in 2017, as a result of both higher current spending relating to salary increases and larger capital expenditure. As a result, Sharjah's budget deficit increased to 4% of GDP in 2018 from 2.8% in 2017. While the disbursement of two years of accrued VAT revenues is likely to narrow the budget deficit on a cash basis in 2019, Moody's expects the budget deficit to widen again in 2020 as the disbursal of VAT revenues begins to align more closely with the timing of their generation. In addition to higher financing needs for the government budget, the government's recapitalization of Invest Bank also contributed to the increase in the debt burden, as did the incorporation of municipal debt into the classification of Sharjah's government debt last year. With a renewed widening of the deficit in the absence of new fiscal consolidation measures, Moody's expects that the debt burden (measured relative to GDP) will continue to rise in the next few years. RATIONALE FOR AFFIRMING THE A3 RATING Sharjah continues to benefit from a relatively diversified economy. In particular, Sharjah's economy is more diversified than the UAE on aggregate due to the small size of the hydrocarbon industry. Sharjah also benefits from relatively high incomes in global terms, broadly in line with the median of A3-rated sovereigns although substantially lower than in neighbouring Abu Dhabi (Aa2 stable) and Dubai. Sharjah's membership in the federal structure of the UAE also provides numerous credit strengths which support the rating at the current level, including a highly credible currency peg, strong banking sector oversight and indirect financial support via spending on infrastructure and social projects. Sharjah's event risk is moderate, the same level as Abu Dhabi (Aa2 stable) and the UAE. The UAE is moderately exposed to geopolitical event risk, which primarily arises from tensions between Iran and members of the Gulf Cooperation Council. Risks include a potential disruption of international shipping through the Strait of Hormuz, which for Sharjah would result in lower customs revenues. The exposure to regional geopolitical event risk is also reflected in UAE's military engagement in Yemen and the current dispute with Qatar (Aa3 stable). about:blank 1/5
2. 7 /19/2019 about:blank Event risks stemming from Sharjah's government liquidity risks or the UAE's balance of payments are limited in Moody's view given the UAE's sizable foreign assets. Notwithstanding the increase in recent years and potential further rise, the moderate level of Sharjah's government debt, and the liquid banking sector, which acts as the government's primary creditor support Moody's view of low government liquidity risks. WHAT COULD CHANGE THE RATING UP/DOWN: Given the negative outlook, an upgrade is unlikely in the foreseeable future. The introduction of fiscal consolidation measures sufficient to arrest the upwards debt trajectory would likely support a stabilization of the outlook, particularly if combined with a track record of decreasing volatility in government revenues. Moody's would likely downgrade the rating if in the absence of a change in fiscal stance, government debt continued to rise faster than government revenues, pointing to weaker fiscal strength and less effective fiscal policy than Moody's currently assumes. GDP per capita (PPP basis, US$): 32,310.6 (2018 Actual) (also known as Per Capita Income) Real GDP growth (% change): 0.6% (2018 Actual) (also known as GDP Growth) Inflation Rate (CPI, % change Dec/Dec): 4.5% (2018 Actual) Gen. Gov. Financial Balance/GDP: -4% (2018 Actual) (also known as Fiscal Balance) Current Account Balance/GDP: [not available] External debt/GDP: [not available] Level of economic development: High level of economic resilience Default history: No default events (on bonds or loans) have been recorded since 1983. On 15 July 2019, a rating committee was called to discuss the rating of the Sharjah, Government of. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased. Other views raised included: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer's susceptibility to event risks has not materially changed. The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable. The local market analyst for these ratings is Thaddeus Best, +971 (423) 795-06. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jaime Reusche VP - Senior Credit Officer Sovereign Risk Group about:blank 2/5
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5. 7 /19/2019 about:blank assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. about:blank 5/5