Fitch Ratings said Abu Dhabi's considered and so far indirect financial support for Dubai is in line with the agency's understanding of Abu Dhabi's attitude to support.

A conservative attitude to support helps underpin Abu Dhabi's 'AA' long-term foreign currency issuer default rating (IDR) which has a stable outlook.

"Fitch expects Abu Dhabi to preserve its own balance sheet strength and avoid actions that could jeopardise its own creditworthiness, while at the same time intervening selectively if needed to preserve the stability of the UAE," Richard Fox, head of Middle East and Africa sovereign ratings, was quoted as saying by our sister publication, the Gulf Daily News.

Abu Dhabi has, in connection with its recent bond issues, explained that although it has no legal obligation to do so, it might choose to provide financial support to other Emirati governments if they were faced with difficulties that threatened the reputation or economic health of Abu Dhabi or the UAE.

In its September rating report on Abu Dhabi, Fitch reiterated that the emirate is under no legal obligation to support other emirates and that if support were requested it would be provided on a case-by-case basis, according to the circumstances.

Fitch's understanding of Abu Dhabi's attitude to support within the UAE federation has so far been borne out by events.

To the agency's knowledge, Abu Dhabi has made no direct bilateral transfer to Dubai. Support has so far been indirect, confined to the $5 billion subscribed by two Abu Dhabi majority state-owned banks to the Dubai government's bond offer on November 25, immediately before the Dubai World debt standstill announcement.

The Central Bank of the UAE, a federal UAE institution, subscribed the initial $10 billion of Dubai's bond issue in March.

Fitch believes the clarification of Dubai's direct sovereign obligations for the first time in October may have made it easier for Abu Dhabi to contemplate direct support for Dubai, should it be required.

Dubai's direct sovereign obligations now amount to $20.3 billion equivalent, and none of them come due until 2011.

By contrast, direct and unconditional support for the much larger and more uncertain liabilities of Dubai-owned entities (Dubai Inc) has clearly been ruled out.

Abu Dhabi's economic development, like Dubai's, is being carried forward by state-owned companies, some of which have been prolific borrowers on international markets, especially this year, when they raised $9 billion.

Fitch has previously warned of the potential for rising public sector liabilities to weaken the sovereign balance sheet.

For the time being, however, public sector debt remains small enough not to raise significant concerns, given the strength of Abu Dhabi's balance sheet.

Total public sector debt is estimated by Fitch (in the absence of regularly published official figures) at just $24.1 billion, of which only $4 billion is directly sovereign, with the rest owed by 100 per cent government-owned entities. This is equivalent to 17 per cent of GDP, compared to sovereign foreign assets of over 200 per cent of GDP.

The main threat to Abu Dhabi's balance sheet would likely stem from the spread of Dubai's difficulties to the wider UAE and the emergence of a full blown banking crisis, including capital flight.

Although UAE banks' asset quality is worsening and is likely to worsen further, overall capitalisation levels of 18 per cent of risk-weighted assets provide a substantial buffer. – TradeArabia News Service