Kuwait credit rating at Aa2 stable: Moody’s

State’s credit profile supported by strong balance-sheet

KUWAIT: Kuwait’s credit profile is supported by the government’s exceptionally strong balance sheet, with assets in the Kuwait Investment Authority (KIA) estimated to exceed 550 percent of GDP, roughly 29 times outstanding government debt in 2016.

Vast hydrocarbon reserves are estimated to exceed 88 years at current rates of production, the credit rating agency Moody’s Investors Service reported on Tuesday. However, the government remains highly dependent on these oil revenues, rendering it vulnerable to oil price volatility.

The outlook for Kuwait’s Aa2 rating is stable. Fiscal challenges arising from a period of lower for longer oil prices are balanced by vast sovereign asset buffers, a low fiscal breakeven oil price, and a gradual fiscal and economic reform program which should ultimately lower exposure to the oil sector.

Steady diversification of government revenues and economic activity away from the oil sector could apply upwards pressure on the rating. Additionally, sustained improvements to the institutional framework, in particular in government transparency and reporting standards, would be credit positive. “We would consider a negative rating action if Kuwait’s reform momentum were to slow beyond the already anticipated, slower-than peer pace, for example, in the event that parliamentary resistance blocks or forces the reversal of planned reforms to government finances and the management of government debt,” Moody’s said in its report.

Fiscal balance

In addition, a further sustained fall in the price of oil, a further marked worsening in the fiscal balance for which there was no clear plan for reversal, and/or signs of falling government financial assets would also exert downward pressure on the rating. A deterioration in the domestic or regional political environment resulting in disruptions to oil production and/or a deterioration in the business climate would also be credit negative.

“We have adjusted Kuwait’s score for economic strength upwards from the indicative “Moderate (-)” to “High (+)” to reflect the country’s exceptionally high wealth levels, as well as its substantial hydrocarbons endowment.”

According to the 2017 BP Statistical Review of World Energy, in 2016 the country had the seventh largest proved oil reserves in the world and the second largest within the group of Gulf Cooperation Council (GCC) countries, after Saudi Arabia (A1 stable). At the current rate of production, these reserves would last for almost 90 years. This translates into high levels of national wealth, and the IMF estimates Kuwait’s GDP per capita in purchasing power terms at approximately USD 71,887 in 2016, the sixth-highest amongst rated sovereigns and slightly higher than Norway’s (Aaa stable). However, the very high dependence on the oil sector has led to wide fluctuations in economic performance. Oil-sector GDP accounted for an average of 62 percent of total nominal GDP between 2011-15, and the oil price shock has significantly reduced nominal GDP.

Vast oil wealth
In addition, partly because of its vast oil wealth, Kuwait has been slower than other highly rated GCC governments to develop its nonoil sector through encouraging private sector activity or attracting foreign investment. This has resulted in an oversized public sector relative to the private sector.

Kuwait’s institutional strength score of “High (-)” is adjusted up from the indicative score of “Moderate (+)”. Positive fiscal reform steps undertaken by the Kuwaiti government so far include the establishment of a debt management unit at the Ministry of Finance (MoF) and improved coordination between key institutions such as Kuwait Investment Authority (KIA), MoF, and Central Bank of Kuwait (CBK). Preparation to implement a medium-term budget framework with plans to cap spending at 2017/18 levels supports this view. Furthermore, the Kuwaiti authorities have signalled renewed willingness to increase transparency with regard to government financial assets.

The successful Eurobond issuance earlier in the year supports improved transparency and institutional development. Kuwait scores only moderately in terms of its institutional framework and government effectiveness in the Worldwide Governance Indicators. Kuwait’s fiscal strength score is “Very High (+)”. Given the extraordinarily large government financial assets managed by KIA, we have adjusted the score upwards from an indicative score of “Very High.”

Moderate risk
As a result of the fall in oil prices Kuwait posted a sharp drop in its fiscal balance to a small surplus of about 1.2 percent of GDP in fiscal year 2015, which ended in March 2016, and we estimate that the fiscal balance deteriorated further to a deficit of 2.6 percent of GDP in fiscal year 2016. This compares to average fiscal surpluses of almost 31percent of GDP between 2010 and 2014. Risks to Kuwait’s fiscal position are further mitigated by a relatively low fiscal break-even oil price, which the IMF projects at around $50 per barrel for 2017 and 2018 (this estimate includes investment income).

Kuwait’s susceptibility to event risk is “Moderate”. Similar to most other GCC countries, Kuwait’s geographical location renders it vulnerable to regional geopolitical event risk, which dominates our event risk assessment for Kuwait. However, Kuwait enjoys close relations with the US (which has demonstrated strong commitment to protecting Kuwait’s sovereignty), other G8 countries, and fellow GCC members. The government also attempts to maintain stable relations with neighboring Iran and Iraq and has taken a mediating role in the ongoing regional diplomatic dispute. We forecast a contraction of 2.7 percent in oil GDP in 2017 as a result of lower oil production volumes, according to the report. However, in the event that OPEC votes to extend or even reduce production allocations in 2018 we would likely look to revise down our 2018 real GDP growth forecasts – which currently anticipates a 1.9 percent expansion in oil GDP – given Kuwait’s strong track record of compliance with productions cuts.

Nonetheless, reaching consensus for further cuts will be challenging given that Russia is likely to oppose further extensions, while Nigeria is pushing for further exemptions due to the delay in bringing its own production back towards 2.1 million bpd, the report concluded. – KUNA

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