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Kuwait’s sovereign ratings affirmed by CI – Outlook remains stable

KUWAIT CITY, Jan 31: Capital Intelligence (CI) today announced that it has affirmed Kuwait’s Long-Term Foreign Currency and Local Currency Ratings of ‘AA-’, and its Short-Term Foreign and Local Currency Ratings of ‘A1+’. The Outlook for Kuwait’s Ratings remains  ‘Stable’, according to CPI financial.

Kuwait’s ratings are underpinned by strong macroeconomic fundamentals and a large net external creditor position, which in turn reflects the government’s prudent management of the country’s substantial oil wealth. The ratings are also supported by the comparatively high level of GDP per capita of around $30,000 in 2015.

Fuelled by renewed capital spending and the resumption of infrastructure projects, the Kuwaiti economy is expected to expand by 1.2 percent in FYE 2016, which ends in March 2016, and by 2.5 percent and 2.7 percent in FYE 2017 and FYE 2018, respectively.

The steep decline in oil prices has adversely affected the public finances. The central government budget which includes estimated investment income is expected to register a small surplus of 1.3 percent of GDP in FYE 2016, compared to a surplus of 26.3 percent in FYE 2015. The intermediate-term fiscal outlook shows increasing downside risk in view of the ongoing period of low oil prices. However, CI currently expects the budget to remain in surplus in FYE 2017 and 2018, benefiting in part from renewed efforts to contain current expenditure, prioritise capital expenditure and diversify revenue sources.

With large financial buffers and substantial room for borrowing, the government is well positioned to weather a sustained period of decline in oil prices. Central government debt remains very low at about 9.9 percent of GDP in FYE 2016 and is issued for monetary policy purposes rather than to finance government spending. Government financial assets are substantial and include the investments of the two state oil funds. The actual level of government assets is uncertain as public disclosure of reserve fund assets is prohibited by law, but is reported to be between 150 percent and 250 percent of GDP.

Reflecting low hydrocarbon prices, Kuwait’s current account surplus is expected to fall below 10 percent of GDP in FYE 2016 and over the intermediate-term. Gross external debt, which is mostly owed by the private sector, is reasonably low at around 19 percent of GDP, and is entirely dwarfed by the government’s external assets.

The sovereign’s ratings continue to be constrained by several factors, including overreliance on the oil sector, which accounted for nearly 60 percent of nominal GDP, 90 percent of exports and about 90 percent of general government revenues in FYE 2015. Further constraints include institutional shortcomings and policy and political risk factors. Sustained periods of declines in oil prices present a major downside risk to the medium-term outlook as they would lead to deteriorating fiscal and external positions.

The government budget is structurally weak, reflecting a very narrow non-oil revenue base and significant expenditure rigidities, with the bulk of total spending geared to the payment of wages, social benefits and subsidies. The private sector of the economy is still rather small and heavily dependent on government spending. The business environment is somewhat challenging; corporate governance practices are below international standards and Kuwait attracts relatively little foreign direct investment. These are weaknesses the government hopes to address as it presses ahead with its reform agenda, following the passage of key privatisation and investment laws.

Prospects for deeper economic reform in the intermediate-term are clouded by the strength of opposition groups within parliament, and the pace of change is likely to remain slow. The ratings also take into account geopolitical risk factors, including risks relating to the worsening situation in neighbouring Iraq.

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