MOODY’S ESTIMATES BUDGET BALANCE BACK TO SURPLUS
FRANKFURT AM MAIN, June 7: Kuwait’s credit profile (Aa2 stable) reflects the country’s substantial oil and gas reserves, historic fiscal and balance of payments surpluses and comparatively low government debt levels, Moody’s Investors Service said in an annual report published last week.
Kuwait’s key credit challenge is its very high dependence on oil and the resulting volatility for its economy, exports and government finances. The country has been slower than its regional peers in developing its non-oil and private sectors. “Kuwait’s credit profile would be supported by a steady diversification of government revenues and economic activity away from the oil sector,” said Thaddeus Best, a Moody’s Analyst and co-author of the report.
“Sustained improvements to the institutional framework, in particular government transparency and reporting standards, would also be positive.” The importance of the oil and gas sector leads to huge swings in the Kuwaiti economy during times of volatile global oil prices. Non-hydrocarbon growth has been supported by the current five-year National Development Plan (2015-19), which provides direction for prioritising capital expenditure, encouraging private investment, and creating jobs for nationals in the private sector.
Public and private investment are expected to sustain non-hydrocarbon growth rates of 3.5% to 4% between 2018 and 2021. Institutional strength and government effectiveness were tested during the oil price slump, with Kuwait’s pace of reforms being much slower than for other Gulf Cooperation Council (GCC) peers.
Reform implementation is likely to be further delayed as oil prices rise. Despite rising government debt levels and Moody’s expectation that government revenues will remain heavily reliant on hydrocarbon revenues for the foreseeable future, Kuwait will maintain an extraordinarily strong government balance sheet and an overall net asset position. Moody’s estimates that the budget balance will return to a surplus of around 7.0% of GDP in the 2018-19 fiscal year, driven largely by rising oil prices.
A further sustained oil price fall, a marked worsening in the fiscal balance and signs of falling government financial assets would exert downward pressure on Kuwait’s sovereign rating.
A deterioration in institutional capacity sufficient to sustain its current creditworthiness would also be credit negative. Until the oil price shock, general government debt had been on a declining trend, falling from 6.2% of GDP in 2010 to a low of 13.1% of GDP by 2013. However, the 2014/15 collapse in oil prices led to a reversal of this trend, partly due to the emergence of fiscal deficits and partly due to denominator effects from the collapse in nominal GDP. Debt climbed to an estimated 9.9% of GDP by 2016, as the government began to issue more debt alongside General Reserve Fund (GRF) drawdowns to plug the increase in the budget deficit. A deterioration in institutional capacity sufficient to sustain its current credit worthiness would also be credit negative.