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Standard & Poor's offers AA credit rating to Kuwait

22 January 2020

The credit rating report released by Standard and Poor's (S & P), the global rating agency, on Friday showed Kuwait’s credit rating at (AA) with stable outlook.

Revealing the rationale behind the rating, it said, the Kuwait’s economy continued to remain oil-dependent, due to which, 90 percent of exports expecting muted economic growth were given a recent OPEC+ decision to extend the oil cut production agreement until 2020, apart from the current regional geopolitical tensions.

OPEC+ is a deal between OPEC and non-OPEC countries to slash the production by at least 1.2 million barrels per day to push prices higher. According to S & P, Kuwait has a substantial savings of more than 400 percent Gross Domestic Product (GDP) accumulated within the sovereign wealth fund. Kuwait's net general government asset position has been forecasted to touch 420 percent of GDP towards end of 2019, considered as the highest ratio of all rated sovereigns.

kuwait economy

The Kuwaiti government surpluses were all set to continue even with lower oil prices ahead, strengthened by investment returns on sovereign wealth fund assets, the global rating agency said.

The Kuwait currency, Dinar, will continue to remain pegged to a US dollar-dominated currency basket, it said. It said that given the stable outlook, Kuwait’s public and external balance sheets will continue to remain strong for next two years, largely due to major foreign assets that has been accumulated in the sovereign wealth fund of the country.

This may help offset risks associated with un-diversified oil-dependent economy of Kuwait to a great extent, it said, adding that the ratings could be increased if a wide range of political and economic reforms improved institutional effectiveness and improved long-term economic diversification, although according to the agency, such a scenario is unlikely until 2023.

The ratings on Kuwait would have been lowered if it was observed that there is a sustained decline in economic wealth due to fall in oil prices beyond the current expectations or materially weaker rates of economic growth. The ratings would also have been lowered if the domestic political stability deteriorated, or if regional geopolitical risks were to escalate considerably, the rating agency said.

The ratings on Kuwait are supported by high levels of accumulated fiscal and external buffers of the country. The ratings are limited by the concentrated nature of economy and comparatively weak institutional settings, in comparison with those of non-regional peers in the same rating category.

As far as Kuwait is concerned, hydrocarbon products contribute to about 50 percent of its GDP, more than 90percent of its exports and about 90 percent of fiscal receipts. Given its high dependency on oil sector, Kuwait economy is considered as undiversified, the agency points out.

The December 2019 OPEC+ decision to further slash oil production limits short-term growth, while the recent escalation of US-Iran tensions also poses risks.

Kuwait was estimated to be the world’s eighth largest crude oil producer with ninth largest oil reserves. Given, the current production levels, Kuwait’s total oil reserves are equivalent to 100 years, while the cost of production is lowest at global level. Given this high concentration, the economic performance of Kuwait may largely continue to be determined by trends in oil industry.

Despite stronger institutional arrangements, Kuwait’s structural reform efforts have lagged behind other regional economies’ in recent years. Unlike Saudi Arabia, the UAE and Bahrain, Kuwait has not introduced value-added-tax.

Without the debt law, the government cannot issue new debt and continues to rely on large asset drawdowns to fund deficits at the government level.  As for flexibility and performance, it said, the strongest net general government asset position of all rated sovereigns formidable government assets as a percentage of GDP remain prime ratings strength. These are due to historical savings of oil profits and are accumulated in the Kuwait Investment Authority (KIA) the sovereign wealth fund.

The Kuwait's exchange rate is pegged to several basket of currencies, dominated by the US dollar, the currency in which majority of Kuwaiti exports are priced and transacted.
The Kuwait foreign exchange regime is more flexible than those in most other GCC countries, and maintain a peg to the dollar alone. For instance, the Central Bank of Kuwait has decided to slash interest rate only once in 2019 by 25bps to 2.75 percent, while ignoring rate cuts by the Federal Reserve in July and September.

It is considered that some degree of monetary-policy divergence between the Federal Reserve and Central Bank of Kuwait is possible, due to the limited amount of portfolio flows between Kuwait and rest of the world.

Despite the challenging operating environment, the Kuwaiti banking sector continues to remain resilient with stable profitability and improved asset quality. The rating agency said that the concentration in the commercial real estate segment continue to remain a key credit risk for banks.

Robin Vinod

Writer/blogger who writes on topics such as travel, real estate, employment and everyday life on GCC countries.

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