Moody’s Sends Dubai’s Neighbor Sharjah Down Into Junk Status

The emirate of Sharjah – one of the seven parts of the United Arab Emirates – has seen its credit rating cut by Moody’s Investors Service to Ba1. Although that only represents a one-notch fall from its previous level, it pushes Sharjah into non-investment grade, more commonly known as junk status.

Announcing the cut, Moody’s said the downgrade was based on its expectation that the emirate’s fiscal position would come under further strain in the next few years. It said the authorities had yet to provide “a credible fiscal adjustment plan” to address rising debt levels and weaker debt affordability metrics.

Sharjah serves as a dormitory town for its better-known neighbor Dubai but has also developed a reputation for supporting culture and the arts – since the late 1990s it has awarded the UNESCO-Sharjah Prize for Arab Culture, in conjunction with the UN’s culture agency, and the emirate is also home to numerous museums. It is also known locally as the UAE’s most conservative emirate, with stricter social rules and alcohol banned across the emirate.

Debt concerns

The downgrade by Moody’s on July 19 comes after rival ratings agency Standard & Poor’s revised its outlook on the emirate from stable to negative in April. It currently has Sharjah pegged at BBB-, which is just above junk status on its ratings system.

Both ratings agencies have highlighted concerns about Sharjah’s fast-rising levels of debt. S&P estimates they have risen from 15% of gross domestic product (GDP) in 2018 to 45% in 2022, with the cost of servicing those debts now eating up almost 20% of the government’s income.

Both agencies say its debts now amount to more than six times the government’s total annual revenue – as recently as 2016, debt levels were closer to twice annual revenues.

Moody’s expects the debt burden to exceed 60% of GDP by 2025, as the government’s spending on social and economic development continues to outpace its revenue. Servicing the debt is expected to take up more than 26% of revenue next year, making its interest payments-to-revenue ratio among the highest of all sovereigns rated by the agency.

A search for sustainability

While the economy is expected to continue growing – and will also continue to rely on its far richer fellow citizens in Abu Dhabi for support – over the longer-term the authorities are likely to come under pressure to put their finances on a more sustainable footing.

Sharjah, like the other ‘northern emirates’ – those parts of the UAE beyond Abu Dhabi and Dubai – has limited natural resources to exploit. It has little of the oil or gas that have enriched Abu Dhabi and its commercial sector is also overshadowed by the regional giant Dubai.

However, some of the other emirates appear to be further advanced in trying to develop new areas of their economy, such as the plans for a casino in nearby Ras Al-Khaimah – although that is something that would not sit comfortably in Sharjah’s more conservative environment.

In May, Fitch Ratings revised the outlook on Ras Al-Khaimah’s rating from stable to positive, noting its “record of prudent fiscal management” and saying the casino resort plans “could provide a significant boost to budget revenue”.