Sunday 04, February 2018 by Jessica Combes

CI affirms Kuwait's sovereign ratings with stable outlook

 

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed Kuwait’s Long-Term Foreign Currency and Local Currency Ratings of ‘AA-’, and its Short-Term Foreign and Local Currency Ratings of ‘A1+’. The Outlook for the ratings remains ‘Stable’.

Kuwait’s ratings are underpinned by the continued strong macroeconomic fundamentals and a large net external creditor position despite the subdued–albeit improved–hydrocarbon price environment. The ratings are also supported by the relatively low fiscal breakeven price, as well as relatively high GDP per capita, a sound banking system and low government debt. The ratings remain constrained by the country’s over-reliance on hydrocarbon, institutional weaknesses and difficult policymaking environment, as well as limited data disclosure and geopolitical risk factors. 

Real output is expected to have contracted by 2.1 per cent in 2017 as the six per cent contraction in the hydrocarbon sector, following OPEC’s decision to cut production, offset the 3.5 per cent growth in the non-hydrocarbon sector. However, real output is expected to continue expanding by a 4.1 per cent and 3.7 per cent in 2018-19 respectively, supported by a pickup in both the hydrocarbon and non-hydrocarbon sectors. Throughout 2019 and 2020, GDP per capita is expected to reverse its contracting streak and resume growth, reaching $29,258 in 2020.

Kuwait enjoys the lowest fiscal breakeven oil price among GCC member states at around $47 per barrel, excluding transfers to the intergenerational equity fund. With hydrocarbon prices expected to average USD55-60 per barrel, CI Ratings expects the central government budget to post surpluses of 1.5 per cent of GDP in FYE 2018 that ends in March 2018 and in FYE 2019, with rising oil revenues partially offset by a pickup in capital spending and in some areas of current spending (the central government budget includes investment income but excludes transfers to the intergenerational equity fund, which are currently set at 10 per cent of oil revenues). Including transfers, the budget is expected to remain in a deficit of 15.3 per cent of GDP in FYE 2018 and FYE 2019. 

With large financial buffers and substantial room for borrowing, the public finances have weathered the period of low oil prices and remain in a better shape than in many GCC peers. Central government debt remains low–albeit increasing to about 27 per cent of GDP in FYE 2018–and is mainly issued for monetary policy purposes and finance capital spending. Government financial assets are substantial and include the investments of the two state oil funds. The actual level of government assets is uncertain as public disclosure of reserve fund assets is prohibited by law but is estimated to have been over $500 billion in 2015.  

The balance of payments reversed to small deficits as imports picked up, while oil receipts were affected by the cut in production. Gross external debt, which is mostly owed by the private sector, is low at around 50 per cent of GDP and is dwarfed by the government’s external assets. 

Domestic political risk factors remained broadly unchanged since the last review. However, regional tensions increased with the ongoing diplomatic crisis between Qatar and certain other GCC member states–namely Saudi Arabia, UAE and Bahrain. Kuwait has so far continued its neutral stance and intensified its mediating efforts. A nearby solution to the crisis currently appears remote and a prolonged crisis could have an adverse impact on the GCC as a whole, arising from higher investor risk perceptions and disruptions to the flow of goods and services. Kuwait is deemed better positioned to weather the aforementioned consequences than other GCC states in view of its limited external financing needs and the relatively wider geographic diversification of its exports and imports.

The sovereign’s ratings continue to be constrained by several factors including the weak structure of the government budget, with a very narrow non-oil revenue base and significant expenditure rigidities, and with 73 per cent of total spending geared to the payment of wages, social benefits and subsidies. 

The economic concentration risk from the reliance on hydrocarbons remains a key vulnerability (the hydrocarbon sector accounts for over 55 per cent of GDP and is the source for around 80 per cent of both budget revenue, and exports of goods and services). The private sector of the economy is still rather small and heavily dependent on government spending. The business environment is somewhat challenging and Kuwait attracts relatively little foreign direct investment. 

The outlook for the ratings is ‘Stable’. This means that Kuwait’s sovereign ratings could remain unchanged within the next 12 months, provided that key metrics evolve as envisioned in CI’s baseline scenario and no other credit quality concerns arise.

The ‘Stable’ Outlook balances the strength of the country’s fiscal and external buffers against the prolonged decline in oil prices, structural economic weaknesses, and uncertainties relating to its policy making system.

  

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