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Fitch Ratings has affirmed Kuwait’s long-term foreign-currency issuer default rating (IDR) at 'AA' with a stable outlook.
Kuwait’s key credit strengths are its exceptionally strong fiscal and external balance sheets.
“These are increasingly offset by Kuwait's institutional paralysis and slow pace in addressing growing public finance challenges stemming from heavy oil dependence, a generous welfare state and its large public sector,” the ratings agency noted.
“Indicators on governance and the business environment are well below the 'AA' median,” it added.
Fitch estimates Kuwait Investment Authority’s (KIA) assets at around $529 billion at the end of the fiscal year ending March 2020, accounting for the bulk of Kuwait's sovereign net foreign asset position at 472 percent of GDP (the highest of any Fitch-rated sovereign).
The agency expects a general government deficit of 20 percent of GDP at 7.3 billion Kuwaiti dinars ($23.6 billion) for FY 2020-2021, with the assumption that the Brent oil prices will average $35 per barrel in 2020 and $45 per barrel in 2021. Fiscal surplus in FY 2019/2020 is forecast to be at around 1 percent of GDP.
In March, the Saudi-led Organisation of Petroleum Exporting Countries (OPEC) failed to strike a deal with its Russia-led allies on oil production cuts, which effectively paved the way for members to pump as much as they want starting April 1.
Oil prices have been trading this week near the $33 per barrel level as Saudi Arabia slashed crude prices for April and planned output hikes after Russia refused to support deeper oil production cuts.
“The government is unlikely to be able to mount a significant fiscal policy response to the oil shock given the ongoing pandemic and parliamentary elections in October 2020,” Fitch said.
The country announced earlier in April measures to boost the economy against the coronavirus pandemic, including soft long-term loans from local banks and loan repayment delays for companies affected.
The government's authorisation to issue debt has expired and it is unable to borrow, even to refinance existing maturities, which currently have to be met out of the General Reserve Fund (GRF), Fitch said.
The GRF holds the accumulated government surpluses after transfers to the Reserve Fund for Future Generations (RFFG). RFFG accounts for around $489 billion of the KIA total.
“Under our forecasts, the foreign assets of the GRF will be nearly depleted in FY20/21, and we assume that the government will resume borrowing and open up the RFFG for financing starting FY21/22,” Fitch said.
The ratings agency believes the government has made minimal progress on its reform programme aimed at boosting its underlying fiscal position, improving the business environment and boosting the role of the private sector as a provider of jobs for a young and growing the population of Kuwaiti nationals.
Fitch estimates real GDP growth was around zero in 2019 while in 2020, overall real GDP growth is likely to be positive amid an expansion of oil production and the commissioning of refinery upgrades, although disruptions related to the coronavirus will likely push the non-oil economy into recession for the year.
Fitch expects Kuwait’s oil output to average 2.8 million barrel per day in 2020 (from less than 2.7 million barrel per day in 2019).
The country’s current account deficit is forecast at 4 percent of GDP in 2020.
“We estimate that a $10/bbl change in the average oil price from our baseline assumption would shift Kuwait's fiscal balance by around 9 percent of GDP. An additional 100,000 bbl/day of oil production would impact the fiscal balance by around 1 percent of GDP,” Fitch said.
(Reporting by Gerard Aoun, editing by Seban Scaria)
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