Moody’s Investors Service (“Moody’s”) has affirmed the Government of Kuwait’s long-term local and foreign currency issuer rating at A1. The outlook remains stable.
The decision to affirm the ratings is supported by Moody’s assessment that Kuwait’s balance sheet and fiscal reserves will remain strong for the foreseeable future, which preserves macroeconomic and external stability and anchors the credit profile. In return for this key credit strength, a still difficult political environment limits the prospects for reforms that would reduce the vulnerability of the economy and public finances to long-term carbon transition risks.
The stable outlook reflects balanced risks to ratings. The effective implementation of measures to reduce the government’s exposure to oil revenues and to diversify the economy, which Moody’s does not currently factor into its baseline assumptions for at least the next two years, could increase resilience. of Kuwait’s credit profile to fluctuations in oil prices. In contrast, the accelerating global momentum towards the carbon transition that drives down demand and the price of oil, in the absence of reforms, including the passage of legislation to expand government financing options , can reintroduce liquidity risks and weigh on the longer-term credit profile. Kuwait’s domestic and foreign currency ceilings remain unchanged at Aa2.
The narrower-than-average two-notch spread between the local currency ceiling and the sovereign rating reflects the stability of the country’s balance of payments through episodes of oil price volatility, versus the exposure of the economy to a key source of revenue and a difficult domestic political environment that constrains prospects for reform and diversification. The zero gap between the ceiling in foreign currency and the ceiling in local currency reflects very low transfer and convertibility risks, given the country’s very large net external creditor position, which includes significant foreign exchange reserves held by the central bank.
Ratings
Rationale Kuwait’s balance sheet and fiscal reserves will remain strong for the foreseeable future Kuwait’s credit profile is supported by its large reserves of sovereign wealth and very low level of indebtedness, and Moody’s expects Kuwait’s balance sheet to government remains extraordinarily strong for the foreseeable future. In addition, in the current environment of high oil prices and increased production agreed by the Organization of the Petroleum Exporting Countries (OPEC) with some other major oil exporters, Moody’s expects the government is reaccumulating liquid assets in its General Reserve Fund (GRF), which will eliminate liquidity risk – even if self-imposed – for at least the next two to three years.
Moody’s estimates that the liquid assets of sovereign wealth funds (SWFs) managed by the Kuwait Investment Authority (KIA) far exceeded the size of its GDP at the end of 2021 and dwarfs government debt by just under 6% of GDP. at the end of fiscal year 2021 (year ending March 2022). The size of Kuwait’s sovereign assets as a percentage of GDP is one of the three largest in the world, along with Norway and Abu Dhabi. With oil prices rising sharply this year due to the Russian-Ukrainian military conflict, coupled with higher oil production under the OPEC+ deal, Moody’s expects Kuwait’s stock of sovereign assets increases over the next two years. This is driven by Moody’s forecast that Kuwait will run a budget surplus of 7-8% of GDP in FY2022 and around 2-3% of GDP in FY2023, on the based on the rating agency’s oil price assumptions of $105 and $95 per barrel on average in 2022 and 2023, respectively.
Additionally, with very limited amounts of debt to be repaid and no requirement to transfer surpluses to the Future Generations Fund (FGF, which is at the discretion of the Minister of Finance after the law was amended in September 2020), Moody’s expect excesses to accumulate in the GRF as liquid buffers. The reaccumulation of assets after seven consecutive years of drawdowns due to budget deficits will strengthen Kuwait’s credit profile and eliminate the need for public financing and any associated liquidity risk while the budget balance is in surplus.
While these needs will return from fiscal year 2024 when, based on Moody’s oil price assumptions, Kuwait will run budget deficits again, the short-term period of high oil prices gives the government enough time to take certain measures that would enable it to finance its deficits. At the same time, the large proportion of SWF assets invested in liquid foreign currency assets helps preserve macroeconomic and external stability. Moody’s believes that Kuwait has a very large net international investment position due to FGFs and that foreign exchange reserves are abundant.
Kuwait’s very large stock of foreign assets significantly reduces the risk of external vulnerability by supporting the credibility of the currency peg and deterring speculation against the Kuwaiti dinar, even during periods of low oil prices. In turn, the monetary policy regime – which relies on anchoring the central bank’s exchange rate to a basket of currencies with the US dollar as its primary policy tool – has been effective in maintaining price stability and limit the volatility of inflation. In terms of fiscal policy, buffers – to the extent that they can be used – also help to limit pro-cyclical fiscal policies, especially when oil prices are low, allowing the government to continue to support the economy. For example, over the period 2020-2021, despite the low price outlook, Kuwait kept government spending relatively unchanged in nominal terms, which supported the economy. Levels of non-performing loans in the banking system remained low even after the expiration of the loan deferral program launched by the central bank during the coronavirus pandemic.
Persistent Challenges
At the same time, Kuwait’s very high exposure to developments in the oil sector weighs on the resilience of its credit profile due to the long-term transition away from hydrocarbons. Moreover, compared to many hydrocarbon-producing peers that are making progress in fiscal and economic diversification away from dependence on hydrocarbons, prospects for reform and diversification will remain weak in Kuwait, hampered by the country’s political climate. . In Kuwait, oil revenue accounts for about 90% of government revenue, while hydrocarbon exports account for about 80% of total exports; the contribution of the hydrocarbons sector is among the largest among the sovereigns that Moody’s evaluates. Although the government has sought to introduce fiscal reforms, it has yet to implement any non-oil revenue measures since the oil price shock in 2015, unlike other Gulf Cooperation Council (GCC) countries. ).
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