KUWAIT. Fitch Ratings has affirmed Kuwait’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AA’ with a Stable Outlook. The Country Ceiling has been affirmed at ‘AA+’ and the Short-term foreign currency IDR at ‘F1+’.
KEY RATING DRIVERS
Kuwait’s ratings reflect its exceptionally strong fiscal and external position, balanced against a heavily oil-dependent economy, a degree of geopolitical risk, and weak scores on measures of governance and ease of doing business.
Sovereign net foreign assets were an estimated 270% of GDP at end-2014, underpinned by 184% in external assets managed by the Kuwait Investment Authority across its two funds.
The General Reserve Fund (GRF), the purpose of which is to cover government expenditure, had domestic and foreign assets of an estimated 56% of GDP at the end of fiscal year 2014/15 (FYE15).
The Reserve Fund for Future Generations, which by law receives at least 10% of all government revenues before transfers to the GRF, had 196% of GDP; the transfer has been 25% of revenue in each of the past three years.
Gross government debt was only 5.5% of GDP at FYE15. Kuwait is resilient to the fall in the oil price and the downward revision in the expected oil price path, due to a low cost of oil production and the large size of oil revenues relative to government expenditures.
We expect that Kuwait’s fiscal break-even export price of oil will be USD57/b, below our oil export price forecast for Kuwait of USD64/b in FY16.
We forecast that lower oil-related revenues combined with continued spending growth will cause the general government surplus (including investment income) to fall to 10.6% of GDP in FY16 from an estimated 20.7% of GDP in the preceding fiscal year. The authorities intend to undertake measures that could limit the growth of current spending in the FY16 budget, but capital spending plans are unaffected.
We expect the budget balance to improve to 16.7% in FY17. Similarly, we expect the current account surplus to halve to 15.1% of GDP in 2015 before recovering to 20% of GDP in 2016.
We expect real GDP growth to rise to 1.8% in 2015 and 2.0% in 2016, from an estimated 0.9% in 2014. Growth will be driven by resilient private and public consumption and government capital spending, given stable oil production volumes.
A lower oil price path appears to have had limited impact on the available confidence indicators, while a better relationship between parliament and government should support the implementation of government capital projects.
There has been mixed progress on reforms to address Kuwait’s structural weaknesses. A recent attempt to raise the subsidised price of diesel and kerosene was partially reversed in February after fierce opposition.
However, new laws on foreign direct investment and public private partnerships have recently been implemented and are a step towards bringing Kuwait’s business environment more in line with its peers.
Oil directly accounts for 60% of GDP and 80% of government and external revenues, and government contracts support much of the private sector.
Kuwait ranks better than only 50% of all countries in terms of the World Bank’s governance and ease of doing business measures, while the median ‘AA’ country ranks better than 70% of countries in terms of governance and almost 90% of countries in terms of ease of doing business.
RATING SENSITIVITIES
The main factors that individually or collectively could lead to negative rating action are:
– Sustained low oil prices that erode fiscal and external buffers.
– Spill over from a regional geopolitical shock that impacts economic, social or political stability.
– Adverse domestic political developments that are much more severe than the 2012 protests.
The main factors that individually or collectively could lead to positive rating action are:
– Improvement in structural weaknesses such as reduction in oil dependence, and a strengthening in governance, the business environment and the economic policy framework.
KEY ASSUMPTIONS
– We forecast that Brent crude will average USD65/b in 2015 and USD75/b in 2016.
– We expect Kuwait to maintain stable oil production volumes, in line with its regional peers.
– We assume that regional geopolitical conflicts will not directly impact Kuwait or its ability to trade.
– We assume that the current parliament will maintain its broadly constructive relationship with the government, that any leadership succession will be smooth, and that the domestic political scene will be stable.
Additional information is available on www.fitchratings.com
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