Fitch Ratings announced that the support extended this week to property developer Aldar demonstrates that contingent liabilities remain a risk to Abu Dhabi's balance sheet. But the emirate will not be subjected to as severe a strain as in 2008 and 2009, when its strong balance sheet enabled it to deal with such contingencies, despite much lower oil prices than today.

IMF stress tests suggest that further solvency support for the emirate’s banks will probably not be needed. In addition, we believe that there are limits to the amount of further support Dubai might require, as it has better identified its core liabilities and no longer seeks to prop up its entire public sector. This is in contrast to 2008-2009, when sharply lower oil prices and negative returns for sovereign wealth funds coincided with capital injections for Abu Dhabi’s banks and to bolster Dubai.

Abu Dhabi’s balance sheet remains exceptionally strong, and at current oil prices foreign asset growth should pick up to over 10%. As we said in September, foreign assets provide a substantial cushion to absorb most conceivable economic or oil price shocks.

Fitch rates Abu Dhabi AA with a stable outlook. When we affirmed the rating in September 2011, we noted that contingent liabilities from state owned enterprises were the main threat to the sovereign balance sheet, and that although SOE borrowing had fallen sharply since 2009, overall SOE debt had continued to increase.

Abu Dhabi has made clear its intention to support its flagship SOEs. Our assumption that strategically important, state owned entities will be supported in times of need is reflected in our ratings of Mubadala Development Company PJSC, Tourism Development & Investment Company, and International Petroleum Investment Company PJSC’s, which are aligned with Abu Dhabi’s sovereign rating.

Aldar is neither wholly state owned nor a majority owned government related entity. It is minority state owned via Mubadala. But this week the government of Abu Dhabi announced a second support package, in the form of asset purchases and debt relief, worth around AED 16.8 billion. It takes the total size of government assistance this year to AED 36 billion and confirms Abu Dhabi’s willingness and ability to support strategically important companies in which it has a stake. Aldar is responsible for various priority infrastructure and real estate projects.