KUWAIT: Fitch Ratings has affirmed Kuwait’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘AA-’ with a stable outlook.

Key rating drivers

Fundamental rating strengths and weaknesses:

Kuwait’s ‘AA-’ rating is supported by its exceptionally strong fiscal and external balance sheets. The rating is constrained by Kuwait’s heavy dependence on oil, its generous welfare system and large public sector that could be challenging to sustain in the long term, and a political context that hampers efforts to tackle consistent fiscal and economic rigidities and approve legislation to allow debt issuance and clarify government financing sources.

Exceptionally strong external assets

Kuwait’s fiscal and external balance sheets remain among the strongest of Fitch-rated sovereigns. We forecast Kuwait’s sovereign net foreign asset position will average 529 percent of GDP in 2024-25, remaining one of the highest among Fitch-rated sovereigns and more than 10x the ‘AA’ median. The bulk of the assets are held in the Future Generations Fund managed by the Kuwait Investment Authority (KIA), which also manages the assets of the General Reserve Fund (GRF), the government’s treasury account.

Political divisions hinder reform

Conflicts between the elected parliament 16/03/2024, 00:07 and the 15-member cabinet, are a recurring feature of Kuwaiti politics, resulting in frequent resignations of ministers and dissolutions of parliament, with the most recent dissolution in February leading to elections scheduled for April 4. We assume that elections will result in a parliament composition similar to previous ones (following elections in Sept 2022 and June 2023), where politicians critical of government policies held the majority of the 50 electable seats. We assume that political divisions will continue to constrain policy-making in Kuwait.

Familiar reform challenges

The incumbent government appointed in January 2024 before the dissolution of parliament by His Highness the Amir Sheikh Mishal Al-Ahmad Al-Jaber Al-Sabah, included a new prime minister and a largely technocratic cabinet. The government’s published four-year program (2024-2027) focused on initiatives to enhance non-oil revenue, restructure subsidies and encourage private sector participation to create jobs for Kuwaitis and reduce the fiscal burden. The plan also included passing a new liquidity law that would allow the government to relaunch debt issuance following expiry of the previous authorization in 2017. However, these plans are similar to objectives of previous governments that failed to be implemented due to gridlock with parliament and we remain skeptical that this will change.

Liquidity Law assumed but uncertain

After the election, the government will aim to pass a liquidity law (as previous governments have), but parliamentary approval remains highly uncertain. However, our forecasts, notably for government debt, are based on the assumption that a liquidity law is passed in the fiscal year ending March 2026 (FY25). The assumption illustrates that Fitch considers the rating to be resilient to a moderate rise in government debt.

In the absence of a liquidity law, Fitch believes the government would still be able to meet its limited debt service obligations in the coming years, given the assets at its disposal.

Low debt likely to rise

Gross government debt/GDP remains low, estimated at 3.1 percent of GDP in FY23. Assuming the passage of a liquidity law in FY25, limited fiscal consolidation and lower oil prices, we forecast government debt will rise to 11 percent of GDP in FY25 and further in subsequent years. Nonetheless, during the forecast period, we expect debt levels to remain well below the projected 2025 ‘AA’ median of 48.4 percent of GDP.

Budget balance to deteriorate

Under the government’s reporting convention, which does not include KIA’s investment interest income in revenue (and reflects the financing needs of the government), Fitch estimates that the government balance returned to a deficit in FY23 (5.0 percent of GDP), after recording its first surplus (about 12 percent of GDP) in nearly a decade in FY22. Our estimated deficit is smaller than the government’s original FY23 budget deficit projection of 13.2 percent of GDP, due to a higher-than-budgeted oil price and lower than-budgeted spending. Significant one-off expenditures on arrears on subsidies and unused vacation allowances were offset by underspending in areas such as capex. Under the government’s convention, we forecast deficits of 6.5 percent of GDP and close to 10 percent of GDP in FY24 and FY25, respectively, as oil prices fall, spending pressures persist, and progress with fiscal reforms remains limited.

Our overall fiscal balance numbers include our estimate for investment income, which is not officially disclosed. On this basis, we forecast the budget to post surpluses of 5.2 percent in FY24 (from an estimate of 5.7 percent in FY23) and 0.7 percent of GDP in FY25.

Oil assumptions and dependence

Our forecasts assume an average oil price of $79.8/bbl for FY24, down 5 percent from FY23, while oil output is likely to be broadly unchanged at 2.55mmbbl/d given OPEC+ constraints. In FY25, we assume Kuwait’s average oil price will fall to $71/bbl and that its crude output will rise to 2.66mmbbl/d, assuming that OPEC+ loosens production constraints somewhat. Kuwait Petroleum Corporation aims to boost capacity to 3.2mmbbl/d by FY27, with increases both onshore and in the neutral zone. Budget outcomes are highly sensitive to changes in oil price and production. A $10/bbl change in our oil price assumption for 2024 would affect the budget by close to 4 percent of GDP, all other things equal. A change of 100,000bbl/d of production affects the budget by 1.4 percent of GDP. The fiscal break-even oil price (excluding investment income) will remain high (averaging $93/bbl in FY24- FY25) and the non-oil primary deficit/non-oil GDP is weak at 81 percent, significantly worse than regional peers.

ESG - governance

Kuwait has an ESG Relevance Score (RS) of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Kuwait has a medium WBGI ranking at 53, reflecting low scores for voice and accountability, and middling scores across other governance indicators.

Rating sensitivities

Signs of sustained pressure on GRF liquidity, for example, due to the continued absence of a new liquidity law and of alternative measures will ensure that the government can continue to make good on its payment obligations, including but not limited to debt service.

Public and external finance

Significant deterioration in fiscal and external positions, for example, due to a sustained period of low oil prices or an inability to address structural drains on public finances. Strong evidence that Kuwait’s institutions and political system are able to tackle long-term fiscal challenges, for example, through actions to implement a clear deficit reduction plan that is resilient to lower oil prices, as well as adopt a transparent and sustainable government funding strategy.

Sovereign rating model and qualitative overlay

Fitch’s proprietary SRM assigns Kuwait a score equivalent to a rating of ‘AA+’ on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows: - Structural features

1 notch, to reflect the frequency of political standoffs and constraints on enacting key economic and fiscal reforms, and the lack of meaningful progress on addressing structural public finance challenges stemming from heavy oil dependence, a generous welfare state and a large public sector.

Public finances

We have introduced a -1 notch on public finances after the SRM output improved to ‘AA+’ from ‘AA’ at the time of the previous review, to reflect our expectation of large budget deficits and rising debt over the medium to long term, due to persistent difficulties of reining in a generous public employment and welfare system that could pose challenges if oil revenues decline for a sustained period of time, even as the large government assets provide an important buffer.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centered averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Country ceiling

The Country Ceiling for Kuwait is ‘AA+’, two notches above the LT FC IDR. This reflects strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting LC into FC and transferring the proceeds to non-resident creditors to service debt payments. Fitch’s Country Ceiling Model produced a starting point uplift of two notches above the IDR. Fitch’s rating committee did not apply a qualitative adjustment to the model result. — Fitch Ratings