Solid buffers, real risks, S&P maps strengths, vulnerabilities in Kuwait’s banking system

• Kuwaiti banks are supported by solid financial fundamentals, including strong net foreign assets, stable asset quality, high precautionary provisions, and firm government backing.
• GDP growth around 2.1% in 2026–2027; loan growth to remain strong at 8%–10% annually, after a 9% rise in 2025, supported by reforms and banks expanding beyond Kuwait
• Kuwait projected to run the largest fiscal deficit in the region — about 9% of GDP in 2026 — due to oil dependence and rigid spending.
• Lower oil prices (S&P assumes $60 per barrel in 2026) could pressure fiscal and external balances. Geopolitical tensions remain a risk, but S&P believes regional financial systems have shown resilience in past crises.

Standard & Poor’s Global Ratings says Kuwait’s banking sector is supported by solid financial buffers but still faces structural vulnerabilities, according to its latest country risk assessment.

The agency highlighted several key strengths of the Kuwaiti banking system, including a strong net foreign asset position, stable asset quality, high precautionary provisions, and significant government backing underpinned by the state’s broad financial capacity.

However, S&P also flagged structural risks. These include the high concentration of exposures to individual names on both sides of banks’ balance sheets, the economy’s heavy dependence on oil sector performance, and substantial exposure to the cyclical real estate sector.

S&P expects Kuwait’s real GDP growth to average around 2.1% in 2026 and 2027, slightly higher than the estimated 2% growth in 2025.

Recent reforms and the continued expansion of Kuwaiti banks beyond the domestic market have supported credit growth. The sector’s loan portfolio expanded by around 9% in 2025, and S&P forecasts lending growth will remain strong at 8%–10% annually through 2026 and 2027, driven by structural factors.

Across the Middle East, S&P projects economic momentum to remain firm. Regional growth is expected to accelerate to 3.4% in 2026, up from 3% in 2025, supported by higher oil and gas production and sustained non-oil activity — particularly in the UAE and Saudi Arabia — alongside the launch of Qatar’s new LNG production.

In its outlook for Middle East sovereign ratings in 2026, S&P said governments continue pursuing initiatives to maximize oil and gas revenues, including infrastructure investments to boost production capacity, while also pushing to develop more sustainable non-oil private sectors, especially in Saudi Arabia.

Still, diversification efforts carry heavy fiscal costs. These pressures are more pronounced in an environment of lower oil prices, with S&P assuming an average oil price of $60 per barrel in 2026.

S&P said its regional sovereign ratings factor in the possibility of temporary spikes in geopolitical tensions and oil price volatility. However, underlying support remains strong due to large liquid government reserves and a regional track record of mutual financial support, which enhances resilience.

Government responses to weaker oil prices have strengthened credit profiles in recent years. The average regional sovereign rating improved to “BBB” from “BBB-” over the past two years, reflecting measures to increase fiscal flexibility, including the introduction of new revenue streams such as value-added tax and corporate taxes, and improved public spending transparency.
Many countries in the region now have greater fiscal flexibility than during the sharp oil price decline that began in 2014, with significantly lower fiscal breakeven oil prices.

For Kuwait, S&P noted that the country is projected to post the largest nominal fiscal deficit in the region, estimated at around 9% of GDP in 2026, due to heavy reliance on oil revenues and rigid government spending patterns.

Despite this, the agency raised Kuwait’s sovereign rating to “AA-” in 2025, citing recent reforms such as the Finance and Liquidity Law, new revenue measures, and major capital investments under Kuwait Vision 2035.

Kuwait also holds one of the largest liquid asset reserves among rated countries, estimated at more than 500% of GDP, providing a substantial financial safety cushion.

S&P warned that lower oil prices could strain external liquidity in countries with significant financing needs, as current account revenues decline. Usable reserves may in some cases be lower than total government financial assets, complicating the ability to meet external obligations.

Geopolitical tensions remain a key risk, although S&P’s base-case scenario does not anticipate a full-scale regional war. Despite heightened risks since the Gaza war in 2023, the agency noted that regional financial markets and banking systems have demonstrated resilience during past crises, limiting widespread spillover effects.