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Rating agency reaffirms AA ranking for Kuwait
August 11, 2018, 4:30 pm

Kuwait continues to hold "extremely large" government and external net asset positions that allow the authorities to gradually implement reforms, said rating agency Standard and Poor’s (S&P Global) in its latest assessment of the country’s economic and financial wellbeing.

Significant stock of financial assets means that public and external balance sheets of Kuwait will remain strong over the next two years and provides for a stable economic outlook, said the agency while affirming the country’s AA/A-1+ ranking for long and short-term foreign and local currency sovereign credit.

"We expect these strengths to offset risks related to volatile oil prices, Kuwait's undiversified economy, and rising geopolitical tensions in the region," the agency said in its appraisal. It also cautioned that it would lower ratings if it found a lower assessment of monetary flexibility in Kuwait, or if the country’s domestic political stability deteriorated, or if geopolitical risks were to significantly escalate.

The agency pointed out that its ratings were constrained by the concentrated nature of the country’s economy and regional geopolitical tensions. Kuwait derives around 55 percent of GDP, more than 90 percent of exports, and about 90 percent of fiscal receipts from hydrocarbon products. Given this high reliance on oil sector, S&P view Kuwait's economy as undiversified.

While expressing skepticism about the potential for immediate economic reforms in the country, the agency added that it would raise the ratings if political reforms enhanced institutional effectiveness and improved long-term economic diversification.

High levels of accumulated fiscal and external buffers lend support to the healthy assessment on Kuwait, said S&P. Clarifying this, the agency added that though the sharp fall in oil prices since 2014 caused some deterioration in Kuwait's income levels, as well as in its fiscal and external metrics, the large fiscal and external assets that were accumulated owing to past oil windfalls have afforded policymakers space to phase in fiscal reforms gradually. The assets also allow the country to counter the decline in hydrocarbon sector by increased spending under Kuwait National Development Plan, particularly on infrastructure projects.

The agency forecast that economic activity would pick up in the country over the next four years after having contracted in 2017. "We expect rising oil production from the second half of 2018 and public investment to drive real GDP growth of 2.8 percent on average over 2018-2021," it said.

Over the medium term, S&P anticipated Kuwaiti oil output to rise to over three million barrels per day (bpd) by 2020, from around 2.7 million bpd currently, part of Kuwait Petroleum Corporation plans to raise oil production capacity to four million bpd by 2020. It predicted oil prices of Brent crude to average US$65 per barrel in 2018, before falling to $60 per barrel in 2019 and $55 per barrel over 2020-21.

Over the next few years, it expected several projects in power, infrastructure, and housing, currently in various stages of implementation, to be launched and completed. Although domestic politics remains contentious, with strong parliamentary opposition to fiscal austerity, S&P did not anticipate any significant risk to the management of public finances or the economy.

The government's policy response to lower oil prices has been fairly limited and gradual, given the large fiscal buffers, opposition in parliament, and the political will to maintain the social contract with its population and preserve the welfare state. "We expect reform momentum aimed at diversifying revenues will slow further in the context of higher oil prices during 2018, particularly the introduction of VAT, leading to continued central government budget deficits,” warned the agency. The government plans to meet financing needs by balancing debt issuances and asset drawdown, subject to parliamentary approval.


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