Dagong Maintains Sovereign Credit Ratings for Kuwait at AA with Stable Outlook
Dagong Global Credit Rating Co., Ltd.
Aug 1, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings for the State of Kuwait (“Kuwait”) at AA, each with a stable outlook. Low oil prices have undermined Kuwait’s wealth creation capability, and thereby the government’s financial state has deteriorated dramatically. However, thanks to its large Sovereign Wealth Fund and foreign exchange assets accumulated from fiscal surpluses over previous years, Kuwait‘s government solvency in both local and foreign currencies will remain stable.
The principal reasons for maintaining the sovereign credit ratings of Kuwait are detailed below:
1. The country's domestic political environment has fundamentally remained stable, although the implementation of reform will meet some resistance. Kuwait’s political environment remains stable as the House of Sabah, the ruling family, holds its position as the ultimate authority of the country. However, power struggles amongst the ruling family and conflicts between the cabinet and the parliament will continue, which will exert negative impacts upon the long-term stability of the country's political situation. To mitigate the effects of low oil prices, Kuwait plans to carry out economic diversification and fiscal consolidation policies. However, the implementation of such plans is impeded by several negative factors, such as poor governance, obstructions from the parliament and relevant stakeholders, as well as a sharp drop in fiscal revenues, thereby hampering the progress of reform policies. Meanwhile, regional tensions suggest that Kuwait’s geopolitical risks will persist over a long period of time.
2. Sluggish domestic demand and a reduction in oil production lead to economic recession, and so the vulnerability of the country's wealth creation capability will persist for a long time. In the short term, despite a recovery in oil prices, the OPEC reduction agreement, which stays valid until March2018, will lead to a decline in Kuwait’s oil production. Combined with weak domestic demand, as caused by fiscal consolidation and a tightened monetary policy, Kuwait’s economic growth is expected to shrink by 0.2% in 2017, and will rebound to 2.0% as oil production increases in 2018. Its undiversified industrial structure and labor imbalance render Kuwait’s economy relatively fragile, as medium- and long-term economic development is still highly dependent upon the oil industry due to limited progress of the country's diversification strategy.
3. The country's short-term primary fiscal deficit will narrow due to oil price recovery and fiscal consolidation, while Kuwait‘s large Sovereign Wealth Fund may serve to ensure stable repayment sources. Accounting for more than two thirds of fiscal revenue, oil revenues are highly susceptible to fluctuations in international oil prices. Fiscal revenues will substantially increase due to a rise in oil prices, as well as an increase in investment incomes and tax revenues. At the same time, fiscal expenditures will significantly fall through, further reducing fuel subsidies, raising public charges, and closing down some government agencies. The primary fiscal deficit of Kuwait’s central government will narrow by 6.3 percentage points to 11.2% in 2017, although still at a high level. However, the Sovereign Wealth Fund has reached 4.5 times the amount of GDP, and can therefore serve as an effective cushion against the pressures of debt repayment and public investment, thereby stabilizing repayment sources.
4. The government retains strong solvency in both local and foreign currencies. Considering the fiscal deficit, the central government‘s debt burden is expected to increase to 19.1% in 2017 and 22.8% in 2018. However, with substantial financial reserves and a rational debt structure, the government can continue to maintain robust solvency. The coverage of short-term external debt by foreign exchange reserves was 162.5% in 2016. Massive foreign exchange assets will continue with sustained current account surpluses. Together with a secure position as an international creditor, government solvency in foreign currency remains robust.
In the short term, the gradual recovery of international oil prices and the continued advancement of large-scale infrastructure projects will drive Kuwait's economic development forward. Under the influence of fiscal consolidation policies, the country's fiscal deficit will gradually narrow. Additionally, the significant Sovereign Wealth Fund and a substantial amount of foreign exchange can shore up the country's robust government solvency in both local and foreign currencies. Therefore, Dagong has decided to maintain a stable outlook for the local and foreign currency sovereign credit ratings of Kuwait for the next one to two years.