Moody’s credit rating agency affirmed Kuwait’s sovereign credit rating at the “A1” level with a stable outlook, confirming that the country’s credit profile is supported by exceptionally large financial reserves, massive oil wealth with low production costs, and extremely high levels of income.
The agency expected Kuwait to maintain a strong budget in the foreseeable future, even if oil prices fell to a range between $55 and $75 a barrel, noting that the abundant financial resources in the General Reserve Fund will limit liquidity risks in the coming period.
And it expected that Kuwait’s GDP growth would reach 0.7% in 2023 and 3.4% in 2024, and it expected that the account balance ratio of GDP would reach 31.7% in 2023 and 31.9% in 2024, while it expected that the government’s financial balance ratio of GDP would reach a deficit. It will be 1.6% in 2023 and 0.2% in 2024.
Moody’s said that the stable outlook for Kuwait’s credit rating reflects balanced risks, as the effective application of measures to reduce Kuwait’s exposure to oil and its revenues and to diversify the economy (which we do not include in our basic borrowings for at least the next two years) will positively affect the flexibility of Kuwait’s credit file and fluctuations in oil prices.
On the contrary, the global energy transition, which will reduce the demand for oil and drop its prices, in the absence of financial and economic reforms, will negatively affect Kuwait’s credit file in the long run.
The agency confirmed that raising Kuwait’s credit rating depends on a significant improvement in the prospects for financial and economic diversification in Kuwait, which in turn leads to raising our assessment of Kuwait’s sovereign flexibility in facing the risks of the post-oil phase in the long term.
Moody’s explained that the availability of a more productive relationship between the government and the National Assembly then would enhance greater effectiveness of economic policies, increase the government’s ability to respond to economic shocks, and contribute to raising the credit rating.
On the other hand, Moody’s indicated that Kuwait’s credit rating may be downgraded in the event of a significant weakening of the government’s financial strength in the medium term, and in the event that the government is unable to implement reforms and reaches a large fiscal deficit in the event of a drop in oil prices, which may accompany this due to a significant increase in debt and the failure to pass the debt law, or in the event of a decrease in Kuwait’s sovereign reserves.
The agency said that the risks of renewed government liquidity, especially in the event of a large withdrawal of liquidity from the General Reserve Fund due to the large and continuous fiscal deficit, would also negatively affect Kuwait’s sovereign rating, although we do not expect this to happen in the near term.
Moody’s said that it had set the degree of economic strength of Kuwait at “A2” due to the very large oil wealth in Kuwait and its reflection on the per capita share of the country.
However, given Kuwait’s great dependence on oil and its revenues, accelerating the momentum of the global transition beyond oil will exert negative pressure on the economy and on financial indicators. government.
The agency pointed out that despite Kuwait’s possession of the largest proven oil reserves relative to production within the Gulf and its production costs in Kuwait among the lowest in the world, the small size of Kuwait’s economy compared to other Gulf oil-exporting countries and its dependence on oil leads to economic growth and achieving a more volatile GDP than other Gulf countries.
Moody’s said compared to many of its oil and gas producing peers around the world, including the Gulf states, Kuwait lags significantly in its progress in financial and economic reforms.
Although the reason for this backwardness is largely driven by sovereign tensions in the country, the continuous delay in Kuwait’s implementation of reforms (such as maximizing non-oil revenues) and economic diversification projects increases Kuwait’s exposure to the long-term risks of post-oil transition.
The agency added that the management of monetary policy in Kuwait enjoys credibility and effectiveness, as evidenced by the low levels of inflation and the relative stability of the dinar since it was linked to an undeclared basket of currencies.
The regulations of the Central Bank of Kuwait are generally strong and prudent, and this is reflected positively in the financial stability of the Kuwaiti banking system during periods of macroeconomic volatility.
Kuwaiti banks have high capital and liquidity, and strong coverage of non-performing loan provisions.
Moody’s confirmed that Kuwait’s strong public budget is mainly the result of huge financial surpluses that it maintained in the past when oil prices and production were higher than current levels, estimating that government financial assets, which are controlled by the Kuwait Investment Authority in the Generations Fund, reach about 290% of GDP total until the end of 2022.
Moody’s rated the risks of Kuwait’s external financial position at AA, confirming that Kuwait possesses huge reserves of foreign currencies held by the Central Bank, in addition to the huge reserves of foreign assets held by the Kuwait Investment Authority, which greatly reduces the risks of the country’s external financial position.
It is expected that Kuwait will achieve large financial surpluses in the current account in the foreseeable future, according to the agency’s current assumptions for oil prices.
The agency said, “After Kuwait achieved strong growth in GDP in 2022 by 8.1%, the decline in the country’s oil production this year, in line with (OPEC +) decisions to reduce production, will drop Kuwait’s GDP growth sharply to 0.7%. In 2023. It expected the GDP of Kuwait’s oil sector to contract by between 3% to 3.5% in 2023, likely to be matched by strong growth of the country’s non-oil economy by between 4% and 5% in the current year.
Moody’s stated that Kuwait’s draft general budget would result in a modest financial surplus, based on the assumption of an average oil price of $85 per barrel in 2023 and $83 per barrel in 2024, estimating that government oil revenues will decrease by 16% in 2023 due to lower oil prices and production.
Moody’s stated that our assessment of Kuwait’s financial strength at “AAA” takes into account the very low government debt burden, and the very large financial reserves that help fend off high fluctuations in revenues, knowing that 80% of Kuwaiti government revenues are derived from oil.
However, the agency said, the very low government debt burden in Kuwait is partly due to its inability to issue new debt securities since the public debt law expired in 2017.
In the event that the government obtains the approval of the National Assembly on a new debt law, the government debt burden will gradually increase with the return of fiscal deficit in the medium term in the absence of economic diversification reforms when oil prices drop to a range between 55 and 75 dollars per barrel in the medium term.
Nevertheless, Moody’s expects Kuwait to maintain a strong public budget for the foreseeable future.