MARC has affirmed its foreign currency sovereign rating of AAA/stable on the State of Kuwait (Kuwait), based on its national rating scale. The rating reflects Kuwait’s significant fiscal and external buffers. Meanwhile, its heavy reliance on oil, as well as weak governance and institutions, are credit concerns. Kuwait faces rising fiscal and economic pressure due to the impact of the COVID-19 pandemic. Notwithstanding this, the credit outlook remains stable, thanks largely to its considerable buffers and y-o-y improvements thus far in the prospects for oil demand and prices.

Kuwait’s fiscal and external buffers are exceptionally strong credit features. Its sovereign wealth fund, the Kuwait Investment Authority (KIA), has assets under management worth more than USD690 billion. Meanwhile, its net international investment position (NIIP), reflecting its strong external position, stood at a robust 83.9% of GDP in 2020.

Given weak governance and institutions, the implementation of fiscal and structural reforms to offset credit risks associated with strong oil dependency has been slow. The ongoing Vision 2035 reform effort, if successful, can be expected to, among other things, reduce the economy’s oil dependency and enhance human capital and private sector participation in the economy. This should invigorate private sector–led development and consequently job creation.

In 2020, downside risks surged after the pandemic outbreak triggered a fall in global oil demand. The oil price war that erupted in March did not help. These developments, together with the government’s pandemic-related emergency spending response, had caused the fiscal deficit to increase to 9.4% of GDP. In the same year, GDP had contracted by 8.9%.

Meanwhile, political gridlock continues to stall the progress of the draft debt law which would allow public borrowing to meet heightened financing needs. To avoid a liquidity crunch, the government had swapped assets with the Future Generations Fund (FGF) and dipped into the treasury. Going forward, we expect tensions between Kuwait’s legislative and executive institutions to cool down to ease the gridlock amid the pandemic as well as allow for smooth government funding.

Risks to Kuwait’s stable rating outlook over the immediate term include a spike in new infection cases driven by new virus variants and continuing volatility of global oil demand and consequently prices. If these risks are realised, Kuwait could face further unfavourable macro-financial dynamics ahead. Meanwhile, a more rapid rollout of the vaccination programme, together with reaching some reform consensus between the legislative and executive branches, should partially mute some of the risks to the outlook. Over the medium term, however, we expect oil dependency and weak governance and institutions to remain rating concerns.

Contacts:
Lyana Zainal Abidin, +603-2717 2912/ norlyana@marc.com.my;