MARC has affirmed the State of Kuwait’s (Kuwait) foreign currency sovereign rating of AAA with a stable outlook based on its 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 heavy reliance on oil and weak governance and institutions. The stable outlook is based on the expectation that Kuwait remains capable of responding effectively to domestic and external developments without any significant erosion of its considerable buffers.

The Kuwaiti economic system, backed by sizeable hydrocarbon reserves, remains stable. With gross domestic product (GDP) per capita in 2018 in purchasing power parity terms coming in at 73,706 current international dollars, Kuwait is the world’s eighth richest country. Currently, 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, it allocated capital expenditure equivalent to 17% of GDP in Budget 2019/2020.

Kuwait’s large fiscal and external buffers, thanks to the monetisation of its hydrocarbon reserves, are strong rating supports. The Kuwait Investment Authority – its sovereign wealth fund – has an estimated USD592.0 billion of assets under management. The General Reserve Fund, which the government can draw down to finance budgetary operations, remains significant as a buffer against economic shocks. Meanwhile, current account surpluses continue to accumulate. As of end-2018, Kuwait’s net international investment position stood at a robust 80.7% of GDP.

Kuwait’s heavy reliance on oil subjects the economy to the vagaries of volatile oil prices. For instance, the 2014 global oil price collapse exposed longstanding vulnerabilities of the state-led economy. Given that the oil sector contributes on average about 41% towards national output, the impact of low oil prices on growth and fiscal and external balance sheets is a rating concern. In 2015, for example, Kuwait’s fiscal balance (before transfers to the Future Generations Fund and including investment income) was in deficit.

The rating is also tempered by weak governance and institutions. The pace of reforms remains slow and given relatively better oil prices, reform inertia appears to be setting in. For example, a planned value-added tax has been postponed to 2021. Kuwait’s weak governance and institutions are reflected in its rankings in the World Bank’s Worldwide Governance Indicators project and Ease of Doing Business report.

Contacts:
Ummi Kalsom Yaacub, +603-2717 2934/ ummikalsom@marc.com.my;
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my;
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my.