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S&P affirms Kuwait sovereign rating

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KUWAIT CITY, July 21, (KUNA): Standard and Poor’s affirmed Friday Kuwait’s (AA/A-1+) long and short-term foreign and local currency sovereign credit ratings, with stable economic outlook.

The credit rating agency, in a statement on its website, said it expected Kuwait to continue to hold “extremely large” government and external net asset positions, which would allow authorities to gradually implement reforms. S&P said stable outlook reflects expectation Kuwait’s public and external balance sheets would remain strong over the next two years, backed by a significant stock of financial assets. “We expect these strengths to offset risks related to volatile oil prices, Kuwait’s undiversified economy, and rising geopolitical tensions in the region,” it said.

It added it could lower ratings if it lower assessment of monetary flexibility in Kuwait, and could also lower ratings if Kuwait’s domestic political stability deteriorated, or if geopolitical risks were to significantly escalate. “We could raise the ratings if political reforms enhanced institutional effectiveness and improved long-term economic diversification, although we think such a scenario is unlikely over the forecast horizon,” said the agency. S&P said ratings on Kuwait continue to be supported by sovereign’s high levels of accumulated fiscal and external buffers.

The ratings are constrained by concentrated nature of economy and regional geopolitical tensions. Kuwait derives around 55 percent of GDP, more than 90 percent of exports, and about 90 percent of fiscal receipts from hydrocarbon products. Given this high reliance on oil sector, S&P view Kuwait’s economy as undiversified. The sharp fall in oil prices since 2014 caused some deterioration in Kuwait’s income levels as well as in its fiscal and external metrics, similar to other large oil exporters, it said.

However, it added, large fiscal and external assets that were accumulated owing to past oil windfalls have afforded policymakers space to phase in fiscal reforms gradually and counter decline in hydrocarbon sector by increased spending under Kuwait National Development Plan, particularly on infrastructure projects. It forecasted economic activity to pick up over the next four years after contracting in 2017. “We expect rising oil production from the second half of 2018 and public investment to drive real GDP growth of 2.8 percent on average over 2018-2021,” it said. Although domestic politics remains contentious, with strong parliamentary opposition to fiscal austerity, S&P did not anticipate any significant risk to the management of public finances or the economy.

It predicted oil prices of Brent crude to average $65 per barrel in 2018, before falling to $60 per barrel in 2019 and $55 per barrel over 2020-21. Despite higher oil prices of $55 per barrel in 2017 relative to the previous year, Kuwait experienced a large contraction in real GDP growth of 2.9 percent, said S&P.

The decline was mainly due to a five percent decrease in oil production implemented under the Organization of the Petroleum Exporting Countries’ (OPEC) agreement. “We expect growth to return to positive territory in 2018 on the back of some recovery in oil production expected in the second half of the year … and steady public spending on infrastructure projects. Higher oil prices in 2018-2019 and the delay of the introduction of value added tax (VAT) will also likely support private and public consumption,” it noted.

Over the medium term, S&P anticipated Kuwaiti oil output to rise to over three million barrels per day (bpd) by 2020, from around 2.7 million bpd currently, part of Kuwait Petroleum Corporation plans to raise oil production capacity to four million bpd by 2020.

Over the next few years, it expected several projects in power, infrastructure, and housing, currently in various stages of implementation, to be launched and completed. S&P expected government of Kuwait to delay some fiscal reforms in light of higher oil prices, particularly the introduction of VAT, leading to continued central government budget deficits. The government plans to meet fi- nancing needs by balancing debt issuances and asset drawdown, subject to parliamentary approval.

Kuwait still maintains one of the largest pools of liquid external assets of all the sovereigns “we rate and, in a stress scenario, we believe it would be able to defend its currency peg.”

Lower oil prices since 2014 have caused Kuwait’s government balance to remain deep in deficit, having been in surplus in the fiscal year ended March 31, 2014 or fiscal 2013. During fiscal 2017, S&P estimated the government deficit narrowing to 14.6 percent of GDP, from close to 18 percent in fiscal 2016, owing to higher oil revenues. “We estimate that temporarily higher oil prices in 2018 will support a further reduction in the deficit to 10.6 percent of GDP in fiscal 2018,” it added.

The government’s policy response to lower oil prices has been fairly limited and gradual, given the large fiscal buffers, opposition in Parliament, and the political will to maintain the social contract with its population and preserve the welfare state. “We expect reform momentum aimed at diversifying revenues will slow further in the context of higher oil prices during 2018,” it warned, citing delay in implementation of VAT from 2019 due to non-parliamentary approval.

At the general government level, S&P estimated estimate Kuwait to run a fiscal surplus of eight percent of GDP in 2017-18. “We anticipate that recurrent investment income will allow the general government budget to remain in surplus over the forecast horizon, with the surplus averaging more than 10 percent of GDP over fiscal 2018-2021.”

The Parliament has delayed passing of a new debt law after the previous one expired in October 2017, obstructing any debt issuance thus far in 2018. As a result, the government has resorted to drawing down from the KIA’s General Reserve Fund (GRF) to meet its funding needs, said the agency.

S&P expected the government to pursue a more balanced financing strategy between new debt and asset drawdown from 2019, subject to parliamentary approval of the debt law. Kuwait issued its first sovereign international bond of $8 billion in 2017, and will likely continue to tap external bond markets given current favorable rates, particularly compared with external asset returns. It projected total KIA assets to abount 3.6 fold of GDP at end of 2018.

It added Kuwait ranked the highest among all the sovereigns rated by S&P Global Ratings in terms of net general government assets. It also estimated Kuwait’s net external asset position to remain very strong at more than six times of current account payments over 2018-21, while current account receipts plus usable reserves will cover the country’s gross external financing needs over the next four years.

S&P said Kuwait’s metrics remained stronger than most peers, including in the GCC. Kuwait’s exchange rate wis pegged to an undisclosed basket of currencies. This basket is dominated by the USD, the currency in which the majority of Kuwaiti exports are priced and transacted. “Kuwait’s regime is somewhat more flexible than the foreign exchange regimes in most other GCC countries, which maintain a peg to the dollar alone. We see evidence of this in the recent hiking cycles by the US Federal Reserve, where the Central Bank of Kuwait decided to leave the key discount rate unchanged and lift only the deposit rate,” it said.


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