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Kuwait ratings stability pivots on oil price
December 2, 2017, 4:56 pm

In October, the global rating agency, Fitch Ratings, graded Kuwait’s sovereign wealth fund with an AA stable rating. Credit ratings are used by sovereign wealth funds, pension funds and other large investors to gauge the credit worthiness of a country and consequently they have a major impact on the nation's borrowing costs.

However, the concentrated nature of the country’s economy, with about 60 percent of its GDP, more than 90 percent of its exports, and around 90 percent of fiscal receipts, coming from hydrocarbon products, constrained Kuwait’s ratings. Given the high reliance on a single sector to sustain the economy, the country remains vulnerable to global pressures on oil, including complying with OPEC-mandated production cuts.

The vote of confidence in Kuwait’s economy by global rating agencies — in August, S&P Global Ratings had also accorded Kuwait’s with credit ratings of AA and A-1+ — reflects their expectation that Kuwait's public and external balance sheets would remain strong over the forecast horizon through 2020.

In its assessment of the country’s economic stability, S&P noted that Kuwait’s significant stock of financial assets would allow the country’s public and external balance sheets to remain strong, and offset the risks posed by subdued oil prices, an undiversified economy and a contentious parliament, in addition to ongoing geopolitical tensions in the region.

Elaborating on the resilience of the economy, the ratings agency noted that despite the fall in oil revenues since mid-2014, the creation of large fiscal and external assets from past oil windfalls has allows Kuwait’s policymakers the space to counter slowing growth, by maintaining spending on infrastructure projects. As a result, the economy has remained relatively resilient and job losses, particularly in the public sector, have been minimal.

As a result of oil price fall in 2014, Kuwait's consistent fiscal surplus for more than a decade turned into a deficit in fiscal year 2015/16. Kuwait's first current account deficit of 4.5 percent of GDP was in 2016 compared to a surplus of 3.5 percent in 2015 and an average surplus of nearly 40 percent over 2010-2014. Though the government has taken measures to cut current expenditures — for instance by cutting subsidies and hiking fuel and electricity prices — it has had to draw on its substantial fiscal deposits abroad to support capital expenditures.

Over the forecast horizon through 2020, Fitch Ratings expects government debt to increase from an estimated 18.61 percent in 2016/17 to 22 percent of GDP by 2020.
The agency said it expected the government’s financing mix in FY17/18 to have a similar debt to that of FY16/17, when the government met its budget deficit through withdrawals from its General Reserve Fund (GRF), which holds the accumulated government surpluses of previous years, and through a through bond issuance. The agency added that it expected Kuwait's real GDP to fall 3.5 percent in 2017 (after 3.5 percent growth in 2016) as OPEC-mandated oil production cuts could lead to an 8.3 percent drop in production from 2016 average levels.

With the government repeatedly tapping into the GRF, as it has done for the past three years, it is assumed that the fund has fallen to around KD35 billion. Meanwhile, a new debt law before parliament would allow the government to double its borrowing limit to KD20 billion. If, as is expected, the bill is passed, then debt could approach the new ceiling in FY19/20, when it would be equivalent to 48 percent of GDP. 

Highlighting a hypothetical scenario, Fitch Ratings noted that if fiscal deficits remain at the level expected for the fiscal year ending March 2018 (FY17/18), and that transfers to the Reserve Fund for Future Generations (RFFG) continues at the current rate with the GRF remaining the government’s sole source of financing, then the GRF would be exhausted within about 10 years, while tapping into the RFFG would allow Kuwait to sustain its current deficit for several more decades.

Nevertheless, the agency's stable assessment for Kuwait's economy was buttressed by growth in non-oil sector, which is expected to pick up to three percent in 2017-2019, from the two percent in 2016. Other positive factors include inflation remaining muted despite the recent increase in fuel prices; higher oil prices in recent months, and continuation  of government spending, all of which would help retail trade and confidence indicators to recover from their dip in mid-2016, said the agency.


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