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Fitch affirms Kuwait stable ‘AA’ rating SOVEREIGN BALANCE SHEET SAID EXCEPTIONALLY STRONG

KUWAIT CITY, Dec 20, (KUNA): Fitch Ratings has affirmed Kuwait’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘AA,’ and projected non-oil GDP growth at three percent in 2013. Fitch, in its rating published on its website, said outlooks on longterm IDRs were stable. The country ceiling, it added, was affirmed at ‘AA+’ and the short-term foreign currency IDR at ‘F1+.’ Kuwait’s ‘AA’ ratings are primarily supported by exceptionally strong sovereign balance sheet resulting from oil-related budget and current account surpluses, averaging 29 and 37 percent of GDP respectively over the past decade. Kuwait’s sovereign net foreign assets are estimated at 232 percent of GDP in 2013 and the government debt at 4.9 percent of GDP, much lower than the ‘AA’ median (38.6 percent).

The ratings are constrained by exposure to the oil sector (40 percent of GDP, 80 percent of government revenue and current account receipts), noted Fitch. It added that efforts to develop non-oil economy have been hampered by a lack of political consensus on reforms and constraints on implementation capacity. Fitch expected the budget and current account surpluses to gradually reduce to respectively 23 percent and 33 percent of GDP by the fiscal year to March 2016 from an estimated 34 percent and 44 percent in Fiscal Year 2013. These projections reflected an expected lower oil price ($100 per barrel by 2015 from $105 in 2013) and continuing rapid public spending and import growth.

Growth
Despite rapid current spending growth (more than 24 percent on average over the last five years and equivalent to an estimated 36 percent of GDP in FY 2014), Kuwait’s breakeven oil price — the price of oil that balances actual government spending — at $54 per barrel in 2013, is only about half the actual oil price. Fitch Ratings expected domestic politics to be more stable in 2014 than in 2013 and 2012 following the election of a new Parliament in July 2013. Stability should also benefit from the formal approval by the constitutional court of the new electoral law in June 2013. “Given Kuwait’s recent political history, there is still risk of political tensions, including a return to direct confrontation between the executive and the legislative powers,” said Fitch.

The rating agency expected improved cooperation between Parliament and government to support progress in project implementation. Public plans to develop infrastructure in Kuwait, such as the 2010-14 development plan, have largely lagged behind other Gulf Cooperation Council countries so far. However, the recent start in construction of the Sabiya Causeway (a $2.6bn project first tendered in 2006) is an “encouraging signal.” Fitch forecasts non-oil GDP to grow by three percent in 2013, after 2.2 percent in 2012, primarily driven by increased public spending.

Rapid wage growth in the public sector, including a 25 percent increase in mid-2012, has supported consumption. Non-oil growth should increase to 3.5 percent by 2015 with continuing rapid growth in public sector wages and higher public investment supported by a more favorable political environment. Fitch forecasts oil production to increase gradually (over one percent in 2014 to more than 1.4 percent in 2015) after a 2.6 percent decline in 2013.

Fitch said structural weaknessnes were common among the GCC countries, including weak governance and development indicators relative to ‘AA’ peers, weaknesses in the economic policy framework (such as a lack of monetary autonomy and weak fiscal framework) and regional political risks.

However, Fitch said its stable Outlook showed upside and downside risks to the rating were currently well balanced. At forecast oil prices, Kuwait will continue to accumulate assets, further enhancing its capacity to deal with economic shocks. Fitch said it assumed that a severe and sustained negative shock to oil price is unlikely.

It expected Brent oil prices to decline relative to 2013 ($105 per barrel) but remain above $100 by 2015, comfortably higher than Kuwait’s breakeven price. Fitch expected world GDP growth to increase gradually to 3.2 percent by 2015, from 2.3 percent in 2013, which will support global demand for oil. Fitch assumes no major political crisis in the region, such as a confrontation between Iran and the international community.

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