Fitch Ratings-London-04 December 2015: Fitch Ratings has affirmed Kuwait's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA'. The Outlooks are Stable. The Country Ceiling has been affirmed at 'AA+' and the Short-Term foreign currency IDR at 'F1+'.
Key Rating Drivers
Kuwait's key credit strengths are its exceptionally strong fiscal and external metrics and, at around USD 48/barrel, one of the lowest fiscal break-even Brent oil prices among Fitch-rated oil exporters. Forecast fiscal and external surpluses will continue to add to the country's existing buffers, if at a lower rate than historically. These strengths are tempered by Kuwait's heavily oil-dependent economy, a degree of geopolitical risk, and weak scores on measures of governance and ease of doing business.
Kuwait has ample assets to cover medium-term spending needs. We expect total assets managed by the Kuwait Investment Authority (KIA) to reach USD472bn (377% of GDP) in FY2015/16 (FY15) and continue to rise beyond that due to investment returns and on-going transfers of revenue. Based on unofficial, publicly available sources, we estimate KIA assets were USD456bn (298% of GDP) at the end of FY14, up from USD424bn at the end of FY13. KIA assets could be used to cover more than six years' worth of government spending, and we expect this coverage ratio to be maintained. At an expected 8.3% of GDP in 2015, debt will be one of the lowest for Fitch-rated sovereigns.
Even as total KIA assets rise, we expect that its General Reserve Fund (GRF), the purpose of which is to cover immediate government spending needs, will slowly shrink from the estimated USD85bn in FY14. The GRF, which is mostly invested domestically, receives the balance of revenue and expenditure excluding investment income and after the transfer of at least 10% of total revenue to the Reserve Fund for Future Generations (RFFG), which is entirely invested abroad. The transfer to the RFFG has been 25% of revenue in each of the past three years, but we assume that from FY15 it will revert to the 10% specified by law. GRF should still continue to be able to cover at least one year of government spending. We expect external assets managed by the KIA to rise to USD405bn (324% of GDP) in FY15.
We expect the general government to maintain a surplus of KWD1.8bn (4.9% of GDP) in FY15, down from KWD8bn in FY14, including investment income but before transfers to the RFFG. This is driven almost entirely by a fall in oil-related receipts. Similarly, we forecast that the current account balance will fall to USD5bn (4.1% of GDP) in 2015, interrupting a history of double-digit surpluses since 1999. Under our baseline oil price assumptions, fiscal and external balances will recover in 2016-2017, although they will be held back by a pick-up in capital spending and the domestic economy.
In response to the deterioration in revenues, the government is implementing cuts to current expenditure as per its FY15 budget passed in July this year (three months into the fiscal year, which starts in April). Goods and services expenditure was down 50% yoy in the first six months of the FY and subsidy payments have fallen, both as a result of the lower oil prices; the wage bill has remained roughly constant. Our assumptions for the full FY are aligned with these outturns. Capital spending has grown in the first six months, and we expect it to edge up to KWD2.2bn from KWD1.8bn for the full year.
The government is considering fiscal reforms for implementation in the FY16 budget. These include the introduction of VAT and a business profit tax, an expenditure cap below forecast FY15 levels, and a reform that would standardise pay across the public sector and constrain growth of the government wage bill. The authorities also considering a gasoline subsidy reform for implementation in early 2016, following partial elimination of diesel and kerosene subsidies in early 2015.
We estimate that real GDP will grow by 0.8% in 2015, after a 1.6% drop in 2014, accelerating to 3.5%-4.0% over the following two years. The oil sector has held back real total growth over the past two years, and we expect it to fall by 0.5% in 2015 and rise by 3% a year thereafter, reflecting the Kuwait Oil Company's plans to increase capacity. We expect non-oil growth to be 2% in 2015 and accelerate to 4% in the years beyond, after an increase of 1.2% in 2014. Capital spending will contribute more than half of overall growth. Consumption will also be a steady contributor, as reflected in the growth of private credit and card transactions.
Oil directly accounts for 50% of GDP and 60%-70% of fiscal and external revenues, and government contracts support much of the private sector. Kuwait ranks better than only around 50% of all countries in terms of the World Bank's governance and ease of doing business measures, compared with 80% for the median 'AA' country. The gap between Kuwait and is regional and rating peers has been increasing. Although the overall economic policy framework is a weakness, prudent and strict regulation by the Central Bank of Kuwait has contributed to a well-capitalised, liquid and profitable banking sector.
Rating Sensitivities
The main factors that individually or collectively could lead to negative rating action are:
- Sustained low oil prices that erode fiscal and external buffers.
- Spill over from a regional geopolitical shock that impacts economic, social or political stability.
- Adverse domestic political developments that are much more severe than the 2012 protests.
The main factors that individually or collectively could lead to positive rating action are:
- Improvement in structural weaknesses such as reduction in oil dependence, and a strengthening in governance, the business environment and the economic policy framework.
Key Assumptions
We forecast that Brent crude will average USD55/b in 2015-2016, and USD65/b in 2017. We expect Kuwait to maintain stable or gradually rising production volumes, in line with its regional peers and plans to increase oil production capacity.
We assume that regional geopolitical conflicts will not directly impact Kuwait or its ability to trade.
We assume that the current parliament will maintain its broadly constructive relationship with the government, that any leadership succession will be smooth, and that the domestic political scene will be stable.
Contact:
Primary Analyst
Paul Gamble
Senior Director
+44 20 3530 1623
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst
Krisjanis Krustins
Associate Director
+852 2263 9831
Committee Chairperson
Andrew Colquhoun
Senior Director
+852 2263 9938
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.
Additional information is available on www.fitchratings.com
© Press Release 2015
