Fitch Ratings has affirmed Ras Al Khaimah’s long-term foreign-currency issuer default rating (IDR) at ‘A’ with a stable outlook, saying the emirate has a low and declining government debt burden and high GDP per capita.

The ratings are also supported by the benefits of RAK’s membership of the UAE, while the emirate’s small size and weaknesses in the policy framework weigh on the ratings, Fitch said in a statement.

“The emirate derives substantial support from its membership of the UAE… Close integration within the UAE has allowed the emirate to focus on its development strategy and build a relatively diversified economy dominated by manufacturing and services,” it added.

Fitch said it expects the debt of the government and its state-owned enterprises to fall to below 20 percent of GDP in 2019 from 33 percent in 2015.

It added that the debt will fall further to close to 17 percent of GDP in 2020 as the government uses VAT receipts for the early repayment of AED678 million of private placements.

Fitch noted that the government’s fiscal surplus increased to 2.6 percent of GDP in 2018 from 1.4 percent in 2017, buoyed by the recovery of mining and quarrying activities and receipts from the sale of the government’s 41 percent stake in Union Cement Company.

Fitch also forecast a fiscal surplus of 2.7 percent of GDP in 2019, largely underpinned by RAK’s receipt of close to two years’ worth of VAT, amounting to over 2 percent of GDP.

VAT was introduced in the UAE in 2018 and collected at the federal level, but an agreement on the share to be remitted to individual emirates was only reached in early 2019, which delayed the disbursement of the first year’s collection.

Fitch added that GDP growth will slow slightly to 2.5 percent in 2019 from 2.8 percent in 2018 as the momentum from the rebound after the Qatar embargo fades and UAE-wide growth is expected to remain muted while the development of RAK’s container port could also spur new investment in the free zones and the broader economy.

However, the continuation of the housing market slump in Dubai has led to a reduction in building permits and mortgages issued in RAK and could also weigh on tourism, Fitch said.

Decreasing hotel occupancy rates were seen during the first half of 2019 although they remain high.

“The government is making progress on developing the emirate as a tourist destination, and a doubling of hotel capacity by 2023 is in the pipeline. A further escalation of tensions between Iran and the US and its regional allies could also have repercussions for RAK,” Fitch noted.