Standard & Poor’s Ratings Services raised its local and foreign currency sovereign credit ratings on the State of Kuwait to ‘AA’ from ‘AA-‘. The short-term ratings were affirmed at ‘A-1+’. The outlook is stable.
The transfer and convertibility (T&C) assessment, which reflects Standard & Poor’s view of the likelihood of the sovereign (or central bank) restricting nonsovereign access to foreign exchange needed for debt service, is affirmed at ‘AA+’.
“The rating actions are supported by Kuwait’s high GDP per capita and strong external and fiscal balance sheet positions, which carry a larger weight under Standard & Poor’s recently revised sovereign rating criteria. In our view, these strengths comfortably balance our assessment of Kuwait’s rating weaknesses, which include an ineffective political setup leading to sustained gridlock between the government and parliament, a strong dependence on hydrocarbons, slow progress thus far on structural reform, and a lack of transparency regarding government assets,” S&P in a statement said.
According to S&P Kuwait’s public finances remain exceptionally strong, and the general government budget has been recording surpluses at double-digit percentages of GDP for almost a decade.
“We estimate the 2010/2011 budget year–which ended on March 31, 2011–to have concluded with a budget surplus of 20% of GDP, after 28% the previous year. Budget revenues stem overwhelmingly from oil and investment income, which we estimate to have accounted for a combined 95% of government revenue in the budget year to March 31, 2011,” it added.
“The government has accumulated a robust net asset position, estimated at about 211% of GDP at year-end 2010. However, disclosure on the size and structure of government’s assets is extremely limited and constitutes a rating weakness. The spillover from recent political events in the Middle East and North Africa into Kuwait appears minimal. In our view, this is partly explained by Kuwait’s more open society, particularly in terms of freedom of expression, political participation, and political accountability, when compared with that of many of Kuwait’s regional peers.”
“Relations between the government, effectively appointed by the Emir, and the elected National Assembly remain tense. This is underlined by the resignation of the government in April to avoid cross-examination of ministers through parliament. We expect the policy stalemate between the government and parliament to remain a salient feature of Kuwaiti politics,” S&P explained.
“The stable outlook reflects the balance between Kuwait’s very strong fiscal and external positions, on the one hand, and its ineffective, gridlocked political system, undiversified economy, and the lack of transparency regarding government assets on the other. An improvement in the relationship between the government and the parliament, along with a political consensus that helps to accelerate both private domestic and foreign investment, could support long-term diversification of the economy, which would eventually also be positive for the rating.”
Conversely, S&P said, Kuwait’s creditworthiness could come under pressure if there is a deterioration of domestic political stability, an escalation of geopolitical risks, such as a worsening of relations with Iran or Iraq, or a significant and sustained erosion of the government’s asset position.