Kuwait's sovereign credit ratings get stable outlook
DUBAI, July 21, 2018
Leading ratings agency S&P Global Ratings has affirmed its 'AA/A-1+' long- and short-term foreign and local currency sovereign credit ratings on Kuwait with a stable outlook.
The stable outlook reflects S&P expectation that Kuwait's public and external balance sheets will 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 stated.
"We could lower the ratings if we lower our assessment of monetary flexibility in the country. We could also lower the ratings if Kuwait's domestic political stability deteriorated, or if geopolitical risks were to significantly escalate," said S&P in its report.
The ratings agency 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.
The ratings on Kuwait continue to be supported by the sovereign's high levels of accumulated fiscal and external buffers.
The ratings are constrained by the concentrated nature of the economy and regional geopolitical tensions. Kuwait derives around 55 per cent of GDP, more than 90 per cent of exports, and about 90 per cent of fiscal receipts from hydrocarbon products, said the report.
Given this high reliance on the oil sector, we view Kuwait's economy as undiversified, it stated.
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.
However, large fiscal and external assets that were accumulated owing to past oil windfalls have afforded policymakers the space to phase in fiscal reforms gradually and counter the decline in the hydrocarbon sector by increased spending under the Kuwait National Development Plan, particularly on infrastructure projects.
According to S&P Global Ratings, the economic activity would 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 per cent on average over 2018-2021," he added.
Despite higher oil prices of $55/bbl in 2017 relative to the previous year, Kuwait experienced a large contraction in real GDP growth of 2.9 per cent, said the ratings agency in the report.
The decline was mainly due to a 5 per cent decrease in oil production implemented under the Organization of the Petroleum Exporting Countries (OPEC) agreement,, it added.
On the 2018 outlook, S&P Global Ratings said it expected 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 (following an agreement reached by Opec on June 22, 2018, 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 stated.
Over the medium-term, the ratings agency anticipates that Kuwaiti oil output will rise to over 3 million barrels per day (bpd) by 2020, from around 2.7 million bpd currently.
Kuwait Petroleum Corporation plans to raise oil production capacity to 4 million bpd by 2020, said the report.
This ambitious target would be supported by recent news that Kuwait and Saudi Arabia plan to resume oil production at their shared neutral zone from 2019, it added.-TradeArabia News Service
