Moody’s affirms Kuwait ‘A1’ rating

Moody’s Traders Service (“Moody’s”) affirmed the Authorities of Kuwait’s long-term native and international foreign money issuer rankings at A1. The outlook stays secure.

The choice to affirm the rankings is underpinned by Moody’s evaluation that Kuwait’s stability sheet and financial buffers will stay robust for the foreseeable future, which protect macroeconomic and exterior stability and anchor the credit score profile. Balanced towards this key credit score power is the persistently difficult political surroundings that limits the prospects for reforms that would cut back the vulnerability of the economic system and authorities funds to long-term carbon transition dangers.

The secure outlook displays balanced dangers to the rankings. Efficient implementation of measures to scale back the federal government’s publicity to grease income and diversify the economic system, which Moody’s doesn’t presently issue into its baseline assumptions for no less than the following two years, could increase the resilience of Kuwait’s credit score profile to grease worth fluctuations. In contrast, accelerating world momentum in the direction of carbon transition that lowers the demand for and worth of oil, within the absence of reforms together with the passage of laws to increase the federal government’s financing choices, could reintroduce liquidity dangers and weigh on the credit score profile long term. Kuwait’s native and international foreign money nation ceilings stay unchanged at Aa2.

The narrower-than-average two-notch hole between the native foreign money ceiling and the sovereign score displays the nation’s secure stability of funds by means of episodes of oil worth volatility, towards the economic system’s publicity to a key income supply and a difficult home political surroundings that constrains reform and diversification prospects. The zero-notch hole between the international foreign money ceiling and native foreign money ceiling displays very low switch and convertibility dangers, given the nation’s very giant web exterior creditor place that features ample international alternate reserves held by the central financial institution.

Rankings
Rationale Kuwait’s stability sheet and financial buffers will stay robust for the foreseeable future Kuwait’s credit score profile is supported by its giant sovereign wealth buffers and really low debt degree, and Moody’s expects the federal government’s stability sheet to stay terribly robust for the foreseeable future. Moreover, within the present surroundings of excessive oil costs and rising manufacturing agreed by the Organisation of the Petroleum Exporting Nations (OPEC) with another main oil exporting international locations, Moody’s expects the federal government to reaccumulate liquid property in its Basic Reserve Fund (GRF), which can get rid of liquidity threat – even when self-imposed – for no less than the following two to 3 years.

Moody’s estimates that liquid sovereign wealth fund (SWF) property managed by Kuwait Funding Authority (KIA) far exceeded the scale of its GDP on the finish of 2021 and dwarfs the federal government’s debt of slightly below 6% of GDP on the finish of fiscal 2021 (12 months ending March 2022). The scale of Kuwait’s SWF property as a share of GDP is likely one of the three largest globally, along with Norway and Abu Dhabi. With the sharp improve in oil costs this 12 months pushed by the Russia-Ukraine navy battle, coupled with larger oil manufacturing below the OPEC+ settlement, Moody’s expects Kuwait’s inventory of SWF property to develop over the following two years. That is pushed by Moody’s forecast that Kuwait will run a fiscal surplus of 7-8% of GDP in fiscal 2022 and round 2-3% of GDP in fiscal 2023, primarily based on the score company’s oil worth assumptions of $105 and $95 per barrel on common in 2022 and 2023, respectively.

Furthermore, with very restricted quantities of debt to repay and no requirement to switch surpluses to the Future Generations Fund (FGF, which is on the discretion of the finance minister after the change in legislation in September 2020), Moody’s expects the surpluses to be accrued in GRF as liquid buffers. The reaccumulation of property after seven consecutive years of drawdown due to fiscal deficits will bolster Kuwait’s credit score profile and get rid of the necessity for presidency financing and any related liquidity threat whereas the fiscal stability is in surplus.

Whereas these wants will return from fiscal 2024 onwards, when, primarily based on Moody’s oil worth assumptions, Kuwait will once more run fiscal deficits, the near-term interval of excessive oil costs supplies time to the federal government to take some measures that will permit it to finance its deficits. In the meantime, the big proportion of SWF property invested in liquid, international foreign money property assist protect macroeconomic and exterior stability. Moody’s estimates that Kuwait runs a really giant web worldwide funding place due to FGF and international alternate reserves are ample.

Kuwait’s very sizeable inventory of international property considerably decrease exterior vulnerability threat by supporting the credibility of the foreign money peg and deterring hypothesis towards the Kuwaiti dinar, even in periods of low oil costs. In flip, the financial coverage regime – which depends on the central financial institution’s alternate fee peg towards a basket of currencies together with the US greenback as the principle coverage instrument – has been efficient in sustaining worth stability and limiting inflation volatility. When it comes to fiscal coverage, the buffers – to the extent that they can be utilized – additionally assist restrict procyclical fiscal insurance policies particularly when oil costs are low, permitting the federal government to proceed supporting the economic system. For instance, over 2020-21, regardless of the prospect of low costs, Kuwait saved authorities expenditure comparatively unchanged in nominal phrases, which supported the economic system. Nonperforming mortgage ranges within the banking system have remained low even after the expiry of the mortgage deferral programme launched by the central financial institution through the coronavirus pandemic.

Persistent challenges
On the similar time, Kuwait’s very excessive publicity to developments within the oil sector weighs on the resilience of its credit score profile due to the long-term transition away from hydrocarbons. Furthermore, in comparison with many hydrocarbon producing friends which are making progress in fiscal and financial diversification away from reliance on hydrocarbons, prospects for reforms and diversification will stay weak in Kuwait, hampered by the nation’s political local weather. In Kuwait, oil income accounts for round 90% of presidency income whereas hydrocarbon exports make up round 80% of complete exports; the contribution of the hydrocarbon sector is among the many largest throughout sovereigns that Moody’s charges. Though the federal government has sought to introduce fiscal reforms, it has but to implement any nonoil income measure because the oil worth shock in 2015, in contrast to different international locations within the Gulf Cooperation Council (GCC).

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