Last week, Ras Al Khaimah became the 118th sovereign to be assigned a credit rating by Standard & Poor's. S&P designated the emirate an investment grade, awarding it a long-term 'A' rating for foreign and local currency sovereign risk and a short-term grade of 'A-1' was also assigned to the emirate. The emirate also received an 'A' rating from Fitch.
Crown Prince Sheikh Saud bin Saqr Al Qasimi responded positively to the rating, saying "I believe that for any country to understand where they stand and where they aspire to be they need to create a benchmark to assess their ability to pay back their debts."
"Ras Al Khaimah needs to show investors that we are a business community that operates in a stable environment and understands the meaning of profit and loss," he added
The rating exercise for RAK was led by the Investment and Development Office (IDO), with Standard Chartered Bank (SCB), as the Ratings Advisor. Mohammed Sultan Al Qadi, CEO of IDO, described the credit ratings as "independent votes of confidence in the economic program and fiscal position of Ras Al Khaimah".
Obtaining an independent rating is a significant development for RAK, enabling it to promote itself as an attractive investment location in its own right. S&P's stable outlook for RAK will also give a boost to companies already operating in the emirate. "The positive rating reflects the wider United Arab Emirates (UAE)'s capacity to cover RAK's modest liabilities, and the likelihood of extraordinary support in the event of financial stress," commented S&P analyst Ben Faulks.
Potential constraints that could affect RAK's rating were mentioned by Faulks. "Downward pressure on the rating could result from a worsening of regional geopolitical tensions, a fall in demand for RAK's main outputs due to a regional downturn, or a deterioration in Abu Dhabi's creditworthiness." Faulks noted though that an improvement in any of these factors could result in a future upgrading of RAK's credit rating.
In calculating RAK's rating, S&P took into account several broad macroeconomic factors. RAK has very little debt - 16.5% of Gross Domestic Product (GDP), according to S&P estimates. Furthermore, the government's holding of liquid assets gives the emirate a net asset position of around 25% of GDP. Constraining factors included concerns as to the liquidity - and indeed valuation - of government equity in local companies, which could be a factor in the event of domestic stress. The relatively small size of RAK's economy (around $3.5bn) also limits the emirate's capacity for sustaining debt.
RAK's entry into the credit rating fold reflects the attention paid by the emirate over the past few years to foreign investment. The Ras Al Khaimah Investment Authority (RAKIA) was established in 2005, and has so far attracted over 575 companies. In recognition of his achievements in attracting inward investment, the CEO of RAKIA, Khater Massaad, received the 2007 "personality of the year" award for the Middle East from fDI Magazine, part of the Financial Times group.
Obtaining a strong credit rating is key to ensuring that RAK is able to back-up its evident investment potential with the security necessary for the largest investors. "It is very important for the emirate as it brings interest groups, investments, and developers," Imad Haffar, CEO of real estate developer RAKEEN, told OBG.
"The announcement reflects the credibility of the emirate as a business hub. The rating significantly raises the bar for the ease with which equity can be raised within RAK. We will be witnessing a drastic increase in interest from international banks offering financing for development projects," he added.
Elsewhere in the UAE, and indeed the wider Gulf Cooperation Council (GCC), credit ratings have served as a strong spur for inward investment, and have contributed to the massive FDI inflows experienced in recent years in places such as Dubai and Abu Dhabi.
Indeed, so successful have the GCC states been in improving their economies and safeguarding the wealth entrusted to them, that Moody's issued a Special Comment at the end of last year explaining why they had not been awarded Aaa status. The comment, entitled "Why Are the Wealthiest GCC Countries Not Rated Aaa?", explained that, although some GCC states outperformed even Aaa-rated countries, there were several reasons why no GCC state had yet received the top rating.
Foremost among these was a concern over the geopolitical stability of the region, although the note also mentioned the developing nature of institutions in GCC countries, and volatility in market performance allied to the large role played by oil in their economies. How long the ratings agencies will determine these factors remain in place is uncertain. For the time being though, RAK has joined its larger UAE and GCC neighbours in being considered a viable investment opportunity in its own right.