MARC has affirmed the State of Kuwait’s (Kuwait) foreign currency sovereign rating of AAA with a stable outlook based on MARC’s national rating scale. The rating reflects Kuwait’s robust fiscal and external buffers. Its credit strengths are, however, tempered by its heavy reliance on oil, as well as weak governance and institutions. The stable outlook is based on MARC’s expectation of Kuwait’s ability to respond effectively to domestic and external developments without eroding its considerable buffers.

Oil-rich Kuwait’s exceptionally large fiscal and external buffers are strong rating supports. The Kuwait Investment Authority (KIA), its sovereign wealth fund, is the fourth largest in the world and has an estimated USD533.7 billion (396% of GDP) of assets under management. Its General Reserve Fund (GRF), which can be drawn down to finance the government’s budgetary operations, provides a significant financial buffer against potential economic shocks. Meanwhile, current account surpluses continue to strengthen the country’s buffers against external shocks. Its strong external position is also reflected in its net international investment position (NIIP), which stood at a robust 91.8% of gross domestic product (GDP) as at 3Q2019.

The novel coronavirus (COVID-19) outbreak and the corresponding collapse in oil demand pose a major risk to Kuwait as nearly 70% of its revenue base is dependent on oil. The continued delay in the approval of new debt, which prevents the government from borrowing, is putting pressure on its GRF, which serves as recourse to cover deficit financing. The fiscal deficit is expected to widen against a backdrop of sustained weak oil prices coupled with a pandemic-led economic fallout.

Kuwait’s rating is also tempered by weak governance and institutions. The pace of reforms to address growing economic challenges remains slow. This is reflected by low parliamentary support for critical structural reforms such as passing the new debt law, phasing out untargeted subsidies and the introduction of a Value-Added Tax (VAT). Among Gulf Cooperation Council (GCC) member countries, Kuwait is the only economy that has yet to implement VAT and excises. The former, supposed to take effect in 2018 according to initial plans, has been postponed twice, once to 2019, and again to 2021.

Despite strong economic headwinds, MARC believes that Kuwait has the ability to continue meeting the challenges head-on, thanks to large fiscal buffers. However, that ability may weaken going forward if reform efforts are not stepped up, especially if global crude oil prices remain subdued. Having said that, we think that spending restraint to reduce the government’s burgeoning expenditure could come into play only after the COVID-19 crisis ends. This is because austerity measures during this unprecedented crisis would likely worsen any recession hitting Kuwait.

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