MARC Ratings has affirmed the State of Kuwait’s (Kuwait) foreign currency sovereign rating of AAA/stable based on its national rating scale.  The rating reflects Kuwait’s significant fiscal and external buffers. These credit strengths are, however, balanced by credit concerns that include its heavy reliance on the oil sector, political tensions that continue to affect policymaking, and weak governance and institutions. 

After chalking up negative gross domestic product (GDP) growth of 8.9% in 2020, its worst performance since the Global Financial Crisis (GFC) of 2009, the outlook has improved amid relatively favourable oil prices and production outlook. The International Monetary Fund (IMF) expects GDP growth in 2022 and 2023 to come in at 8.7% and 2.6%.

Kuwait’s large buffers remain its strongest credit features. Its sovereign wealth fund, the Kuwait Investment Authority (KIA), is the fourth largest in the world with assets under management worth an estimated USD737.5 billion in 2021. Meanwhile, the oil state’s status as a net international creditor is reflected in its high net international investment position (NIIP), which, according to the latest available data, reached 690.8% of GDP in 2020.

Notwithstanding its significant buffers, Kuwait’s structural risks will likely remain elevated if tensions between its legislative and executive institutions continue to affect decision-making and policymaking. Its weak governance and institutions are also credit negatives.  

Though short-term downside risks may have eased with better crude oil prices and higher production, elevated geoeconomic and geopolitical uncertainties mean that the sense of urgency for fiscal and structural reforms remains high. Despite several initiatives, the struggle to develop its non-oil economy continues. Vision 2035, if successful, can be expected to, among other things, reduce the country’s oil dependency and enhance human capital and private sector participation in the economy.  

Kuwait’s stable outlook reflects the balance of upside and downside pressures. On the upside, the boost coming from sustained higher oil prices and production on growth prospects and fiscal flexibility could be better than expected. On the downside, continued political gridlock affecting policy decisions on issues related to, among other things, sustainable comprehensive financing arrangements and economic rebalancing efforts could keep risks elevated.