Global Arab Network | Standard & Poor's - affirmed its 'AA-/A-1+' sovereign credit ratings on Kuwait

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Standard & Poor's - affirmed its 'AA-/A-1+' sovereign credit ratings on Kuwait

Global Arab Network - - Maha Karim

Thursday, 21 May 2009 00:20

Standard & Poor's Ratings Services said it had affirmed its 'AA-/A-1+' sovereign credit ratings on the State of Kuwait. The outlook is stable. "The ratings on the State of Kuwait are supported by the sovereign's rich resource endowment which, combined with prudent policies, has enabled Kuwait to build very strong external and fiscal balance sheet positions in recent years," Standard & Poor's credit analyst Luc Marchand said. "In our view, these strengths comfortably balance some short-term risks linked to the decline in oil prices, oil production cuts and lower non-oil real GDP growth, and increased contingent liabilities from the financial system."

Net external assets--primarily the accumulation of oil revenues held externally through Kuwait's sovereign wealth fund--are projected to reach 425% of current account receipts (CARs) in 2009, underscoring robust external balances. On the fiscal side, the government's net asset position is similarly robust, projected at about 250% of GDP by year-end 2009.

Despite the decline in oil prices, the general government budget in Kuwait should, in our view, again record a surplus of about 12.3% of GDP in fiscal 2009-2010, down from an estimated 17.9% in 2008-2009 (including investment income). Moreover, the government debt burden is light, and paper is issued mainly for monetary policy purposes. With the impact of the cut due to OPEC quotas and slowdown of non-oil growth, overall GDP growth is forecast to turn to negative 1.0% in 2009, before recovering at about 2.3% in 2010.

Politics in Kuwait remain complex. Following the dissolution of parliament by the Emir in March, elections held in mid-May yielded few surprises and the political scene is likely to remain unchanged in the medium term, with frictions between the conservative parliamentary majority and the government significantly curtailing policy-making.

We expect that the recently enacted Financial Stability Law will be ratified by parliament. The plan is aimed at bolstering the financial system, which has been negatively affected by the global financial downturn.
But Kuwait stands out among peers in not providing any additional fiscal boost to the economy. Indeed, the 2009/2010 budget envisages a 36% fall in expenditure, including a 24% decrease in capital expenditure.
Although most of these cuts reflect a reduction in one-off expenditures that was present in the previous budget, it is clear that no additional fiscal stimulus was provided through the new budget. A number of planned infrastructure projects in the oil sector have been cancelled in recent months. While prudent from a fiscal viewpoint, these policies threaten, in our view, to exacerbate the cyclical downturn in the medium term given the predominance of government in economic activity.

Regional geopolitical risks remain high and weigh on the ratings. These risks are, however, partially mitigated by good international alliances, relative domestic social stability, and government assets.

The stable outlook on Kuwait balances the government's strong financial position against elevated regional geopolitical risks, increased contingent liabilities and potential impediments to growth. Significantly reduced geopolitical risk would be important in raising the rating in the future.
A stabilization of the relationship between the government and the parliament along with a political consensus on accelerating both private domestic and foreign investments should, in our view, alleviate major impediments to growth and would be a plus for the rating. Conversely, a sustained worsening of political and event risks, or a significant and sustained erosion of the government's asset position, could put Kuwait's creditworthiness under pressure.

Global Arab Network

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Last Updated on Thursday, 21 May 2009 00:22

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