Press Releases MARC AFFIRMS THE STATE OF KUWAIT’S SOVEREIGN RATING AT AAA

Monday, Aug 13, 2018

MARC has affirmed its public information foreign currency sovereign rating of AAA/stable on Kuwait, based on its national rating scale. The rating reflects Kuwait’s stable economic system that is supported by large oil reserves, large financial buffers, as well as a strong external balance sheet. Its rating strengths are, however, tempered by the economy’s dependence on oil and weak governance and institutions. Kuwait’s stable outlook is based on assumptions that oil prices will continue to recover, albeit gradually, and that its 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. We are, nevertheless, cautious on the outlook because of elevated global tensions arising from ongoing geopolitical and geoeconomic rebalancing.

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 large 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 by 2035, with the private sector playing the lead role.

The government’s substantial financial buffers are important rating supports. Kuwait’s sovereign wealth fund, the Kuwait Investment Authority (KIA), is estimated to manage assets equivalent to about 470% of gross domestic product (GDP). Meanwhile, 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 it has a low fiscal breakeven oil price (2017: USD46.9 per barrel), the lowest among the Gulf Cooperation Council 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 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 imports of goods and services. This figure does not include KIA-managed external assets, which also serve as a buffer to external shocks.

The rating takes cognisance of 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 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 implemented 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 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.


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