Kuwait currently holds a healthy credit profile of Aa2 stable reflecting the country's substantial oil and gas reserves, historic fiscal and balance of payments surpluses and comparatively low government debt levels, says Moody's.
According to the rating agency’s recent report, Kuwait's key credit challenge is its excessively high dependence on oil and the resulting volatility for its economy, exports and government finances. The country is evidently slower than its regional peers in developing its non-oil and private sectors.
Despite rising government debt levels and Moody's expects government income to remain heavily reliant on hydrocarbon revenues for the foreseeable future, Kuwait will maintain an extraordinarily strong government balance sheet and an overall net asset position. Reform implementation is therefore likely to be further delayed as oil prices rise.
"Kuwait's credit profile would be supported by a steady diversification of government revenues and economic activity away from the oil sector. Sustained improvements to the institutional framework, in particular government transparency and reporting standards, would also be positive," said Thaddeus Best, a Moody's Analyst.
Public and private investment are expected to sustain non-hydrocarbon growth rates of 3.5 per cent to four per cent between 2018 and 2021. Moody's estimates that the budget balance will return to a surplus of around seven per cent of GDP in the 2018-19 fiscal year, driven largely by rising oil prices.
The importance of the oil and gas sector leads to huge swings in the Kuwaiti economy during times of volatile global oil prices. Non-hydrocarbon growth has been supported by the current five-year National Development Plan (2015-19), which provides direction for prioritising capital expenditure, encouraging private investment, and creating jobs for nationals in the private sector.
A further sustained oil price fall, a marked worsening in the fiscal balance and signs of falling government financial assets would exert downward pressure on Kuwait's sovereign rating. A deterioration in institutional capacity sufficient to sustain its current creditworthiness would also be credit negative for the sovereign.