MARC has affirmed the State of Kuwait’s (Kuwait) foreign currency sovereign rating of AAA with a stable outlook based on its national rating scale.

The rating is underpinned by Kuwait’s substantial proven crude oil reserves. One of the world’s richest countries, it has one of the Middle East’s oldest and most financially stable economic systems. Thanks to oil revenue, which continues to play a major role in driving economic growth, the government’s fiscal reserves are significant. Its spending on investment has helped develop the non-oil sector, a crucially important move to diversify the economy because Kuwait’s growth model is no longer sustainable against a backdrop of low oil prices. The Kuwaiti economy remains largely state-led with a limited role for the private sector.

Kuwait’s substantial financial buffers with low debt are strong rating supports. The Kuwait Investment Authority (KIA) is estimated to hold financial assets equivalent to more than 460% of gross domestic product (GDP) – with roughly two thirds in the Future Generations Fund (FGF) and one third in the General Reserves Fund (GRF). The latter, available for drawdown to plug fiscal deficits, is about 2.8 times the size of the government’s annual expenditure. Gross public debt remains low, though it ballooned recently because of deficit financing. The government’s fiscal financing options include drawing down on GRF assets and borrowing in the domestic and/or external markets.

Another rating support is Kuwait’s strong external balance sheet, thanks to a history of large current account (CA) surpluses. For example, its CA surpluses over the 2011-2014 period had averaged an astounding 40.3% of GDP. Its vulnerability to external financial and economic risks has thus remained low, even though the CA surpluses have trended downward significantly because of the oil price collapse. Going forward, there are concerns that Kuwait’s external balances could see deterioration if oil prices do not firm up over the long term. Meanwhile, 1Q2017 data show Kuwait’s CA registering a surplus for the fourth consecutive quarter, thanks to slightly better oil prices.

The rating takes into consideration Kuwait’s continued high dependence on oil. This overdependence has caused structural issues that include a state-led economy with large public sector employment, low job creation and declining productivity. Though there are ongoing efforts to diversify the economy and income, the results have been relatively insubstantial because of weak institutions and a poor doing business environment. Meanwhile, the economy is subject to whipsawing oil prices that can cause GDP growth rates to fluctuate wildly, and dampen consumer and business sentiments. Lower oil prices also affect investment, thereby reducing the rate of labour and capital accumulation, and in turn lowering growth contributions.

Kuwait’s rating continues to be tempered by relatively weak governance and institutions. Its institutions are lowly ranked in the World Bank’s Worldwide Governance Indicators (WGI) project. Its doing business environment remains weak, as evidenced by its ranking in the World Bank’s Doing Business report. The fact that Kuwait’s elected parliament is often truculent and tensions between it and the ruling Al-Sabah family persist, do not help. However, we expect rising concerns against a backdrop of still disappointing crude oil prices to generate a renewed sense of urgency and purpose in the government’s reform efforts.

The stable outlook reflects MARC’s assumptions that oil prices have stabilised and regional security issues will not significantly worsen. We also assume that Kuwait’s fiscal and external buffers will not experience a sudden and substantial deterioration and the government remains assiduously committed to its reform efforts. Our expectation is that the buffers will continue to offset risks related particularly to the economy’s overdependence on the oil sector, as well as global and regional uncertainties.

Contacts:
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my;
Afiq Akmal Mohamad, +603-2717 2942/ afiq@marc.com.my.