KUWAIT: S&P Global has maintained Kuwait's credit rating at AA with a stable outlook. On its website late Friday, the rating agency said the stable outlook reflected its expectation that Kuwait's public and external balance sheets will remain strong over the forecast horizon, backed by a significant stock of financial assets. Its report said that Kuwait's internal and external financial positions are expected to have a strong future economic outlook backed by huge financial assets.

The sharp fall in oil prices since 2014 has caused a significant deterioration in Kuwait's income levels - as measured by GDP per capita - as well as in its fiscal and external metrics, as has happened with other large oil exporters. However, the creation of large fiscal and external assets via the transfer of past oil windfalls has afforded Kuwaiti policymakers the space to counter slowing growth by increased spending, particularly on infrastructure projects.

As a result, the economy has remained relatively resilient and job losses, particularly in the public sector, have been minimal. "We estimate that real GDP grew by three percent in 2016 supported by public investment growth. Over 2017-2020, we expect the economy to grow at a similar pace on average supported by public spending on infrastructure projects," it noted.

The first public-private partnership (PPP) projects have been completed since the PPP law came into force in 2015. Over the next few years, other projects in power, infrastructure, and housing, currently in various stages of implementation, are likely to be completed. This will help maintain economic growth, offsetting the effects of low oil prices.

"We also expect a boost to growth as increased capacity from investments in gathering centers and upgrades to existing oil fields gradually come on stream, over the forecast horizon. We expect Kuwait will remain compliant with its commitment to OPEC to cut production to 2.7 million barrels per day (bpd) until the end of 2017. From then on, we anticipate that Kuwaiti oil output will rise to over three million bpd in 2020. Production could increase further if an ongoing dispute in the shared neutral zone with Saudi Arabia is fully resolved."

The agency added that geopolitical tensions persist, with the IS militant group in Iraq and Syria, as well as the ongoing war in Yemen, posing a threat to the wider region and Kuwait. In Kuwait's case, it explained, the central government deficit informs the central government's financing requirement while the overall general government balance includes all levels of government, including flows related to the Kuwait Investment Authority (KIA).

The central government fiscal deficit is likely to close faster if some of the measures the government is currently considering, such as the introduction of a flat corporate tax and a value-added tax, are implemented. However, we do not anticipate that these are likely to come into force before 2019 at the earliest. The Kuwaiti government, via the KIA, has accumulated substantial assets through savings from oil and gas production over the years. The size of assets managed by the KIA is available only as a range of unofficial estimates of up to 5x of 2017 GDP. Weak oil prices prompted Kuwait's first current account deficit of 4.5 percent of GDP in 2016 compared to a surplus of 3.5 percent in 2015 and an average surplus of nearly 40 percent over 2010-2014. The deficit was financed by the liquidation of assets held abroad.

"We project that the current account will return to a surplus in 2019 in line with our assumptions on oil prices and production. Until then we anticipate deficits will be financed by a mix of external borrowing - primarily via sovereign debt issuance - and the liquidation of external assets.

"Even then we estimate that Kuwait's net external asset position will remain very strong at 7.5x current account receipts (CARs) in 2017. Moreover, we project that gross external financing needs will remain relatively low, averaging about 100 percent of CARs plus usable reserves over the next four years." On its external accounts, Kuwait's metrics are very strong, and stronger than those of almost all peers, including in the GCC, the report said. Kuwait's exchange rate is pegged to an undisclosed basket of currencies; this basket is dominated by the US Dollar, the currency in which the majority of Kuwaiti exports are priced and transacted.

"We view Kuwait's financial system as stable; its banks are reasonably well capitalized, with ample liquidity as per Basel III standards, and operate in a reasonably strong regulatory environment. Our Banking Industry Country Risk Assessment for Kuwait is '4', on a scale of '1' (strongest) to '10' (weakest)." - KUNA