MARC has assigned a foreign currency sovereign rating of ‘AAA’ with a stable outlook to the State of Kuwait (Kuwait) based on the rating agency’s national rating scale. The government of Kuwait has no debt rated by MARC. The foreign currency debt country ceiling applies to ringgit-denominated issuances by entities domiciled in Kuwait to reflect the transfer and convertibility (T&C) risk in ringgit-denominated debt issuances by foreign issuers. The rating is based solely on an analysis of information in the public domain.

The ‘AAA’ rating with a stable outlook reflects Kuwait’s economic and fiscal strengths, low general government gross debt, as well as its low external vulnerability. Its strengths are, however, moderated by the economy’s overdependence on the hydrocarbon sector and political stalemate that is affecting political, institutional and economic reforms.

Kuwait is ranked among the world’s richest countries in terms of per capita income, and its local currency is the most highly valued monetary unit in the world. It also has one of the oldest and most financially stable economic systems in the Middle East. The world’s ninth-largest oil producer, Kuwait’s oil reserves are expected to last more than 80 years. The oil & gas sector is an important economic driver, with net exports having the largest share of real gross domestic product (GDP) (2012: 38%). It contributes significantly towards government revenues, and government spending on the public wage bill and investment has had a major role in driving Kuwait’s economic growth.

The Kuwaiti government is in a very strong fiscal position with its revenue-to-expenditure ratio at 1.7 (2013). The resulting large fiscal surpluses accumulated over the years imply both low public sector debt, as well as a large fiscal space to increase capital spending if necessary. The Kuwaiti government’s healthy fiscal position is a major factor supporting the stable outlook of the economy and the country’s sovereign rating.

Another economic strength for Kuwait is its low external vulnerability, evidenced by its external balances which have continued to enjoy surpluses over the years. Kuwait’s current account (CA) surpluses have averaged circa 38% of GDP since 2007 and these large external surpluses have put the country in a very comfortable net external creditor position and provide a large cushion against external risks.

The rating for Kuwait takes into consideration the economy’s overdependence on the hydrocarbon sector, as well as the political stalemate in which clashes between the executive and legislative powers have, to some extent, delayed much-needed reforms. Because oil prices can be volatile, the economy’s overdependence on the oil sector can cause high volatility of real GDP growth. This has important implications for the economic development of Kuwait because there are studies that have shown that high growth volatility negatively affects per capita growth.

While the steady rise in oil prices over the past two years has helped Kuwait build formidable cash reserves, it has also served to postpone serious economic diversification efforts and created a lack of a sense of urgency. Kuwait’s infrastructure lags behind other regional countries, and the private sector has been sidelined. The economy is highly dependent on a bloated and inefficient public sector for output and employment, but rising public spending, including spending on wages and energy subsidies, is becoming unsustainable.

Although the government has launched the Kuwait Development Plan, a series of five-year plans approved by Parliament in 2010 to transform Kuwait into a regional trade and finance hub, clashes between the executive and legislative powers have delayed much-needed reforms and hampered economic restructuring efforts. We view this as a critical issue as the first five-year plan is aimed at increasing the private sector’s contribution to the economy, creating jobs, and providing long-term investment opportunities, all of which Kuwait sorely needs.

The private sector and the government have often pointed the finger at the Parliament for hampering government economic reform efforts and delaying plans for mega infrastructure projects. Additionally, cumbersome bureaucratic formalities have been blamed for hurting the business environment.

Kuwait also does somewhat poorly on the World Bank’s Worldwide Governance Indicators. It scores relatively low in voice and accountability, government effectiveness, regulatory quality, and control of corruption. All these are expected to have adverse repercussions on the country’s efforts to diversify its economy going forward.

The stable outlook reflects MARC’s expectations that Kuwait’s macro-policy stance will remain unchanged, as well as of a generally improving global economy with relatively stable oil prices. We also base our stable outlook on expectations that the political situation will remain stable.

Contacts:
Quah Boon Huat, +603-2082 2231/ boonhuat@marc.com.my;
Afiq Akmal Mohamad, +603-2082 2274/ afiq@marc.com.my;
Nor Zahidi Alias, +603-2082 2277/ zahidi@marc.com.my.