Moody’s holds UAE at Aa2 despite contraction warning, World Bank downgrade

Moody’s is keeping the faith in the UAE, even as forecasters slash their growth outlooks. The ratings agency affirmed the country’s Aa2 sovereign credit rating with a stable outlook despite ongoing disruption to trade through the Strait of Hormuz, Arab News reports.

Growth, however, is another story: Moody’s expects the UAE economy to contract by around 7% in 2026, driven by a 23% decline in hydrocarbon production and a 4% contraction in the non-oil economy. The agency flagged “disruption to trade and confidence-sensitive sectors” as being behind the drop.

Moody’s is the most bearish forecaster yet: Goldman Sachs had also expected a contraction earlier this year, saying it sees 2026 GDP shrinking 5%, while Oxford Economics sees GDP contracting by 0.2%. Others are slightly more optimistic, with the World Bank expecting in its latest report (pdf) growth of 2.4% in 2026, still down sharply from its January forecast of 5% and from the 6.2% growth recorded last year — one of the sharpest forecast downgrades issued by the lender globally. The World Bank also clipped its growth prediction for 2027 to 4.1%, down from 5.1% in January.

Moody’s does see the UAE recovering fast: Moody’s expects the economy to rebound by around 13% in 2027.

Why aren’t ratings agencies worried? Fitch also reaffirmed its AA sovereign rating for Abu Dhabi in May, and the answer for both lies in Abu Dhabi’s balance sheet. Moody’s assumes the emirate would step in if needed, noting that Abu Dhabi’s government financial assets exceeded 300% of GDP at the end of 2025. The UAE also entered 2026 with a AED 17.4 bn federal budget surplus, while federal debt is expected to remain around 3-4% of GDP.

REMEMBER- The UAE still has some insulation from the disruption: The Habshan-Fujairah pipeline allows Abu Dhabi to bypass the Strait of Hormuz for part of its oil exports, while higher oil prices — which Moody’s expects to average USD 90-110 per barrel this year — should partially offset lower export volumes. The country is also looking to expand alternative export routes through plans to boost pipeline capacity and build a separate multi-fuel Hormuz bypass pipeline for refined products.

Still, the pain is expected to spread well beyond the oil sector. Moody’s flagged tourism, logistics, transport, real estate, and foreign investment as sectors likely to come under pressure as weaker confidence and disrupted connectivity weigh on activity.

It’s not just a UAE problem: The World Bank cut its global growth forecast for 2026 to 2.5% and slashed its outlook for the Middle East, North Africa, Afghanistan, and Pakistan region to 1.6%, down from 4% growth last year. The lender warned global growth could slow to as little as 1.3% if energy disruptions spill into financial markets.