Standard and Poor's (S and P) on Friday affirmed its "AA/A-1+" long- and short-term foreign and local currency sovereign credit ratings on Kuwait with "a stable outlook." The rating agency said Kuwait has a rich oil and gas endowment, which has made it wealthy and enabled it to build strong external and fiscal balance sheet positions. Kuwait accumulated these through large oil and gas resources and by managing its wealth in what we (S and P) consider to be a prudent manner, according to a report by the agency. The ratings are constrained by the geopolitical tensions in the region, as well as Kuwait's unpredictable and undiversified economy.
The general government budget has shown a surplus of at least 10 per cent of GDP for the past decade, said the report. "We estimate that -- including our estimate of the government's income from vast investments -- the Kuwaiti government will have a surplus of about 30 percent of GDP for the budget year ending March 31, 2015.
"Our base-case scenario assumes that oil prices, although softening, will remain high, averaging USD 96 per barrel in 2014-2017, and that oil output will increase to about 3.5 million barrels per day by 2017, from about 3.2 million in 2013. "As a result, we project that the general government budget surplus will remain high, at about 20 percent of GDP on average over the next four years (despite our expectations of the oil price moderating). "We estimate the government's investment income was 9 percent of GDP in 2013 and we assume it will remain at about this level, based on our estimate of the average return over the past five years," the report added. Kuwait increased its annual contributions to its Future Generations Fund to 25 percent of total revenues in the fiscal year ending in 2013, from 10 percent in previous years. The remaining surplus is invested by the General Reserve Fund and both funds are managed by the Kuwait Investment.
The government's large net asset position, which we estimate at over 2.7x GDP in 2014, is a significant ratings strength. The strength of oil exports resulted in average current account surpluses estimated at more than 30 percent of GDP in 2004-2013. Combined with the government's policy of investing a large portion of its surplus abroad, this has led to a significant accumulation of external assets.
"At the same time, we project that gross external financing needs will remain low, averaging around 55 per cent of CARs plus usable reserves in the next four years," the report went on.
"We view Kuwait's creditworthiness as susceptible to any future sharp and sustained decline in oil prices. "The oil sector accounts for about 60 percent of nominal GDP, 90 per cent of exports, and 80 percent of general government revenues (including investment income from the Kuwait Investment Authority)," it pointed out.
The stable outlook reflects our expectations of continued strength in Kuwait's fiscal and external positions, backed by oil revenues, it added.