STATE OF KUWAIT - 2019

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 rating reflects Kuwait’s stable economic system backed by sizeable hydrocarbon reserves, and robust fiscal and external buffers. Its credit strengths are, however, tempered by its heavy reliance on oil, as well as weak governance and institutions. The stable outlook is based on MARC’s expectation of Kuwait’s ability to respond effectively to domestic and external developments without eroding its considerable buffers.

The Kuwaiti economic system, backed by sizeable hydrocarbon reserves, remains stable. With gross domestic product (GDP) per capita in 2018 coming in at 73,706 current international dollars (purchasing power parity (PPP) terms), Kuwait is the world’s eighth richest country and the Gulf Cooperation Council’s (GCC) third richest member. There are ongoing economic diversification efforts aimed at ensuring sustainability. The government’s long-term objective is to transform Kuwait into a regional financial and commercial hub. Towards this end, the national Budget 2019/2020 allocated a capital expenditure of KWD3.8 billion (USD12.7 billion), equivalent to 17% of GDP.

Kuwait’s exceptionally large fiscal and external buffers, thanks to the monetisation of its hydrocarbon reserves, are a strong rating support. The Kuwait Investment Authority (KIA), its sovereign wealth fund, is the fourth largest in the world and has an estimated USD592.0 billion (417% of GDP) of assets under management. Its General Reserve Fund, which can be drawn down to finance the government’s budgetary operations, provides a significant financial buffer against potential economic shocks. Meanwhile, current account surpluses continue to strengthen the country’s buffers against external shocks. For example, its net international investment position (NIIP) as of end-2018 stood at a robust 80.7% of GDP.

The economy’s heavy reliance on oil continues to subject Kuwait to the vagaries of volatile oil prices. In the aftermath of the 2014 collapse of oil prices, longstanding vulnerabilities of the state-led economy were exposed. Given that the oil sector contributes a 5-year average of 41% towards Kuwait’s national output, the impact of low oil prices on its growth and fiscal and external balance sheets is significant. In 2015, for example, Kuwait’s fiscal balance (before transfers to the Future Generations Fund (FGF) and including investment income) fell into a deficit equivalent to 0.3% of GDP.

Kuwait’s rating is also tempered by weak governance and institutions. The pace of reforms remains slow and given relatively better oil prices, reform inertia has increased because of the decrease in the sense of urgency to move away from dependence on oil revenue. For example, the Value-Added Tax (VAT) – initially planned to be implemented in early 2019 – has been postponed to 2021. Kuwait’s poor rankings in the World Bank’s Worldwide Governance Indicators (WGI) project and Ease of Doing Business report are reflections of its weak governance and institutions.

Major Rating Factors

Strengths

• Stable economic system backed by sizeable hydrocarbon reserves; and
• Robust fiscal and external buffers.

Challenges/Risks

• Heavy reliance on oil; and
• Weak governance and institutions.