STATE OF KUWAIT - 2018

MARC has affirmed the State of Kuwait’s (Kuwait) foreign currency sovereign rating of AAA with a stable outlook based on MARC’s national rating scale. The AAA rating reflects Kuwait’s stable economic system that is supported by large oil reserves, ample financial buffers, as well as a strong external balance sheet. Its strengths are, however, tempered by the economy’s dependence on oil and weak governance and institutions, which have affected the pace of reforms. The stable outlook reflects MARC’s assumptions that oil prices will continue to recover, albeit gradually, and that Kuwait’s fiscal and external buffers will not suffer any significant deterioration over the medium term. We also assume that the government remains committed to its reform efforts, and that regional security issues will not worsen significantly.

Kuwait is among the world’s richest countries. Its rating is underpinned by its substantial proven crude oil reserves that are expected to last more than 80 years. With ample financial buffers and a sound financial sector, it has one of the oldest and most financially stable economic systems in the region. Economic prospects have improved with the partial recovery of oil prices. The current series of five-year development plans aim to, among other things, transform the state into a financial and trade centre with the private sector playing the lead role by 2035.

The government’s substantial financial buffers are important rating supports. Kuwait’s sovereign wealth fund, the Kuwait Investment Authority (KIA), has been estimated to manage assets equivalent to about 470% of the country’s gross domestic product (GDP). Meanwhile, the central bank holds reserves equivalent to 28% of GDP. Kuwait’s gross public debt remains low, though it has risen recently because of deficit financing after oil prices collapsed in 2014. With oil prices in recovery mode, fiscal performance should improve as Kuwait has a low fiscal breakeven oil price (2017: USD46.9 per barrel), the lowest among the Gulf Cooperation Council (GCC) member countries.

Another rating support is Kuwait’s strong external balance sheet, thanks to persistent current account (CA) surpluses. Its CA surpluses over the 2012–2017 period, for example, had averaged 21.9% of GDP. As a result, Kuwait is a net international creditor. Its net international investment position (NIIP) as of end-2017 stood at USD114.4 billion, equivalent to 95.3% of GDP. Meanwhile, Kuwait’s international reserves as of end-2017 stood at USD31.8 billion, enough to cover 6.7 months of goods and services imports. This figure does not include external assets managed by the KIA, which also serve as a buffer to external shocks.

The rating takes into consideration Kuwait’s continued high dependence on oil. Lower oil prices have affected its fiscal and external balances and budget financing needs have emerged. The economy, largely state-led because of the high oil dependency, faces declining productivity and low job creation. The results of government efforts to diversify revenue and economic activity have been relatively insubstantial because of weak governance and institutions, as well as a poor doing business environment. A case in point: Kuwait’s five-year development plan (2010-2014), its first since 1986, had used less than 57% of the allocated budget.

Kuwait’s rating is tempered by relatively weak governance and institutions. Lowly ranked in the World Bank’s Worldwide Governance Indicators (WGI) project, it is not surprising that bureaucratic delays remain an important issue. In the World Bank’s Doing Business 2018 report, it was ranked at a lowly number 96 out of 190 economies. In addition, tensions from persistent domestic political wrangling could spell further trouble for much needed economic reforms. The political stalemate and continuous gridlock have resulted in numerous cabinet reshuffles, with implications for policymaking and implementation, and hence long-term prosperity.

Major Rating Factors

Strengths

• Stable economic system supported by large oil reserves;
• Large financial buffers; and
• Strong external balance sheet.

Challenges/Risks

• Dependence on oil; and
• Weak governance and institutions.