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���������ֳ� - Hong Kong - 20 May 2024: ���������ֳ� Ratings has upgraded Ras Al Khaimah's (RAK) Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'A+' from 'A'. The Outlook is Stable.

A full list of rating actions is available at the end of this rating action commentary.

Key Rating Drivers

Ratings Upgraded: The upgrade of Ras Al Khaimah's IDRs reflects ���������ֳ�'s expectation of improved credit metrics driven by stronger medium-term growth forecasts, a record of resilience to external shocks, and prospects of stronger fiscal revenue and higher buffers that will further sustain prudent fiscal management. The ratings are supported by the benefits of RAK's membership of the United Arab Emirates (UAE, AA-/Stable), including the significant share of mandatory spending undertaken by the federal government.

Favourable Medium-Term Growth: We expect medium-term growth to benefit from the combination of large investment projects and further economic diversification. Two state-owned enterprises (SOEs), RAK Hospitality Holding and Marjan, have partnered with Wynn Resorts to develop and operate the Middle East's first planned integrated resort on Al Marjan island, expected to open in early 2027. In addition to providing significant short-term growth momentum, we also expect the project to serve as a catalyst to attract further investment that will help increase economic resilience over the longer term, and to speed up the income convergence with peers.

The cost of the integrated resort was initially estimated at USD3.9 billion, or 32% of 2022 GDP, and ���������ֳ� estimates that the construction phase will boost real GDP growth by 1pp in 2023, 2pp in 2024 and 2pp in 2025 above our estimation for UAE's non-oil real GDP growth, with which our forecasts for RAK are usually aligned. The announcement of two other master plans, RAK Central and Beach District, in January 2024 has already raised some interest from domestic and foreign investors. This also contributes to a robust medium-term growth forecast of 6.2% in 2024 and 5% in 2025.

Improving Revenue Forecasts: We expect the combination of investment projects and upcoming changes to tax legislation to support public revenue and help build additional fiscal buffers over the medium term. The two SOEs involved in the integrated resort project are expected to finance substantial equity contributions (to a dedicated special-purpose vehicle, SPV), but we expect these costs to be partially offset by land sales on Al Marjan island and beyond in the short to medium term. We forecast revenue to increase to 22.9% of GDP in 2024 and 21.8% in 2025, from 20% in 2022 and 21.5% in 2023.

In the longer term, dividends from the SPV to the two SOEs, which are incorporated in our general government consolidated perimeter, will support revenue collection. Non-SOE revenue is also expected to increase from 2026 with the introduction of the UAE-wide corporate income tax, and with taxation of gaming revenue.

Improving Macroeconomic Management: The authorities continue to improve governance of SOEs, data collection and macro-fiscal planning and controls frameworks, which supports more efficient use fiscal resources and helps strengthen policymaking. RAK published a new GDP data series in 2022 using surveys according to international standards for the first time, but still lacks high-frequency publications.

Record of Fiscal Surpluses, Temporary Deficits: We assume the government will maintain its prudent fiscal strategy and consider RAK's record of fiscal surpluses to be structural. This reflects the emirate's exceptional spending flexibility due to the large share of profit-oriented SOEs within the public-sector consolidation perimeter. The public-sector budget consolidates the revenue and expenditure of the central government and of non-listed SOEs. We have removed net lending to and investments in other non-consolidated entities from our total consolidated expenditure calculation, considering these transactions as below-the-line acquisition of financial assets, as well as the change in working capital of consolidated SOEs.

We forecast consolidated public-sector deficits of 2.3% of GDP in 2024 and 2025, after a 3% surplus in 2023 and a record of 1%-3% surpluses in previous years, partly due to substantial equity contributions from Marjan and RAK Hospitality Holding to the SPV. We see these fiscal deficits as temporary and they do not affect our assessment on RAK's commitment to fiscal prudence.

Low Debt: We expect public-sector debt to be unchanged at 10.9% of GDP in 2024, before moderately increasing to 11.3% in 2025, reversing the deleveraging of consolidated SOEs that RAK has implemented over the past decade. Of this, about 3% of GDP related to consolidated SOEs in 2023, which ���������ֳ� expects to increase to 4.5% in 2025. We anticipate RAK will fully refinance its outstanding USD1 billion sukuk (7.1% of 2025 GDP forecast) maturing in 2025. We include most SOE debt in headline public-sector debt, 50% of which is guaranteed by the sovereign. Our public-sector debt figure excludes a guarantee of about 2% of GDP extended to a non-government owned company not consolidated in government accounts.

Comfortable Fiscal Buffers: RAK benefits from comfortable deposits of an estimated 15.5% of GDP in 2023. We forecast these deposits will reduce to 11.8% of GDP in 2024 and 10.5% in 2025 to finance the fiscal deficits. Net government debt has consistently declined over the past decade, from 17.3% of GDP in 2015 to an estimated -4.6% in 2023, but we anticipate this will reverse, with net debt reaching -1% of GDP in 2024 and 0.9% in 2025. Nevertheless, RAK will still benefit from a comfortable level of liquid assets that are not included in our net debt calculation, with listed equity investments representing 16.8% of GDP in 2023.

Strong UAE Support: RAK derives substantial support from its UAE federation membership. It shares the UAE's monetary and exchange-rate system, with a credible US dollar peg, strong international reserves and an absence of exchange controls. UAE support compensates for the lack of external sector data. The close integration, with federal spending of an estimated 6.9% of RAK's GDP in 2022, has allowed RAK to focus on its development strategy and build a diversified economy for its size. The UAE's fiscal and external balance sheets benefit from the large sovereign net foreign assets of Abu Dhabi (AA/Stable).

ESG - Governance: Ras al Khaimah has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. We use the UAE's WBGI for assessing Ras al Khaimah, and the UAE has a high WBGI ranking at the 69th percentile, reflecting its record of domestic political stability, strong institutional capacity, effective rule of law and a low level of corruption.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

-Public Finances: A weakening in public finances, for example, due to large, sustained increases in spending or lower SOE profits leading to prolonged budget deficits and a significant build-up of net public debt or contingent liabilities.

- Macro: Deterioration of the medium-term growth outlook, for example, due to sustained lower non-oil growth in the GCC.

- Structural Features: A further escalation of regional conflicts that negatively affect economic, social or political stability.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

- Structural Features: Improvement in structural factors, such as World Bank Governance Indicators at the UAE level.

-Macro/Public Finances: Sustained and robust economic growth, beyond our forecasts that leads to higher GDP per capita, accompanied by other improvements to the policy framework, such as sustained accumulation of fiscal buffers.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

���������ֳ�'s proprietary SRM assigns Ras al Khaimah a score equivalent to a rating of 'BBB+' on the Long-Term Foreign-Currency IDR scale.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to SRM data and output, as follows:

- Macro: +1 notch, to reflect the expected strong medium-term real GDP growth that will enable Ras al Khaimah to further diversify its economy and revenue sources, as well as an improving macroeconomic framework that will strengthen further the economy's resilience to shocks and the government's commitment to fiscal prudence.

- Public Finances: +1 notch, to reflect that a high share of foreign-currency debt, which detracts from RAK's score in the SRM, is not a constraint on RAK's fiscal financing flexibility given the low level of overall debt and the credibility of the peg, and to reflect RAK's proven prudent fiscal strategy that derives from its high level of spending flexibility.

- External Finances: +1 notch, to reflect the benefits of RAK's membership of the UAE federation, including integration within a larger economy and financial system, and the potential for extraordinary financial support.

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. ���������ֳ�'s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Country Ceiling

The Country Ceiling for Ras al Khaimah corresponds to that of the UAE.

The Country Ceiling for the UAE is 'AA+', two notches above its Long-Term Foreign-Currency IDR. This reflects strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

���������ֳ�'s Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. ���������ֳ�'s rating committee applied a further+1 notch qualitative adjustment to this, under the Near-term Macro-Financial Stability Risks and Exchange Rate Risks pillar reflecting that "the Country Ceiling Model dips to +1 due to dollarization of deposits passing 30%. The figure has been historically fairly volatile. It may be related to rising US dollar-denominated hydrocarbon export proceeds or the influx of new residents. External buffers are large and the creation of a UAE dirham yield curve may reduce dollarization in future. These factors support keeping the Country Ceiling two notches above the IDR".

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

The following limitations were identified and addressed:

Data weaknesses still hamper analysis and comparison with peers. National accounts data are limited and not yet methodologically mature. High-frequency data are also absent, as well as emirate specific monetary and balance-of-payments data, which are only compiled at the UAE level and are of weaker quality than for peers, with no international investment position data.

���������ֳ� is able to track the economy by looking at the performance of the government's enterprises. Moreover, Ras Al Khaimah derives substantial support from its membership of the UAE federation. Ras Al Khaimah shares the UAE monetary and exchange-rate system with a credible US dollar peg and absence of exchange controls. Thus, the emirate individually has no need for foreign-exchange reserves and its rating is not constrained by external factors, compensating for the lack of external sector data.

The data used was deemed sufficient for ���������ֳ�'s rating purposes because it expects that the margin of error related to the estimates would not be material to the rating analysis.

ESG Considerations

Ras al Khaimah has an ESG Relevance Score of '5[+]' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As the UAE has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Ras al Khaimah has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As the UAE has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Ras al Khaimah has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As the UAE has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Ras al Khaimah has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Ras al Khaimah, as for all sovereigns. As Ras al Khaimah has a track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ���������ֳ�'s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Country Ceiling Model, v2.0.1 (1)
• Debt Dynamics Model, v1.3.2 (1)
• Macro-Prudential Indicator Model, v1.5.0 (1)
• Sovereign Rating Model, v3.14.1 (1)

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