“The ratings on Kuwait are supported by the sovereign’s high levels of wealth and very strong external and fiscal balance sheet positions, accumulated as a result of the state’s rich resource endowment and what we consider to be prudent wealth management. The ratings are constrained by a difficult political environment, the lack of transparency regarding decision-making and government assets, and limited monetary policy flexibility,” S&P while explaining rationale behind its decision said.
“As a percentage of GDP, the general government budget has been in surplus by more than 10% of GDP for more than a decade. We estimate that the government will have a surplus of about 30% of GDP in the budget year ending March 31, 2014, which includes our estimate of government investment income. Our base-case scenario assumes that oil prices will remain high over the medium term at about $100 per barrel and oil output will increase to about 3.5 million barrels per day by 2015, from 3.1 million in 2012. As a result, we project the general government budget surplus will remain high, above 20% of GDP over the next four years. We estimate the government’s investment income at about 10% of GDP in 2012/2013 and we now assume this will average around 6% of GDP over the next four years, based on our estimate of the average return over the past five years.”
“Kuwait increased its annual contributions to its Future Generations Fund to 25% of total revenues in fiscal year 2012/2013, from 10% in previous years. The remaining surplus is invested by the General Reserve Fund. Both funds are managed by the Kuwait Investment Authority. The government’s large net asset position, which we estimate at around 2.5x GDP in 2013, is a significant ratings strength. However, disclosure on the size and structure of the government’s assets is extremely limited, in our opinion, and a rating weakness.
“Our estimate of trend growth as per our criteria (a weighted 10-year average of real GDP per capita growth) is around -1.5%, which is lower than our marginally positive estimate earlier in the year. Our estimate is affected by our expectations with regard to oil exports, as outlined above, and the upward revision of estimates of Kuwait’s population. The U.N. has revised the database from which we draw our population data via the International Monetary Fund (IMF) International Financial Statistics data. Kuwait’s population is estimated to be higher by 200,000 persons on average over the period 2007-2011,” S&P statement added.
“In our view, Kuwait’s high wealth levels mean that its weak economic growth performance is not an immediate concern for the ratings. However, over the medium term Kuwait could experience deterioration in terms of its economic risk position relative to faster growing economies.
“Kuwait posted current account surpluses averaging more than 25% of GDP between 1994 and 2012, largely because of the strength of oil exports. Combined with the government’s policy of investing a large portion of its surplus abroad, this has caused a significant accumulation of external assets. Kuwait is likely to record a substantial net external asset position of close to 400% of current account receipts (CARs) in 2013. However, in line with our expectation of relatively flat oil exports, we now expect weaker growth in CARs over the forecast horizon, averaging 3% for 2013-2016, compared with 9% during the previous four years.
“We estimate Kuwait’s liquid external assets exceed external debt by close to 3x CARs. At the same time, we project that gross external financing needs will remain low, averaging around 55% of CARs plus usable reserves in the next four years.
“Kuwait experienced political tensions in 2012, including the suspension and dissolution of parliament and two parliamentary elections, alongside street protests by, reportedly, tens of thousands of Kuwaitis calling for better representation within the political system. Kuwait held parliamentary elections for the third time in 18 months in July 2013. The new parliament is more diverse than that of December 2012 and now includes liberals, Sunni Islamists and Bedouin tribes–all have increased their representation since the beginning of the year. This increase in diversity was largely due to a fragmentation in the loose opposition coalition. We expect the ruling family, the Al Sabah, to remain in power. However, continued tension between the parliament and the executive is likely to hamper policy implementation.
“We have factored Kuwait’s underdeveloped political and institutional framework into the current rating level. In addition, Kuwait’s exchange rate is pegged to an undisclosed basket of currencies, constraining its monetary flexibility. We therefore define monetary flexibility as limited under our criteria.
“We view Kuwait’s creditworthiness as susceptible to any future sharp and sustained decline in oil prices because the oil sector accounted for an estimated 63% of nominal GDP in 2012, 93% of 2012 exports, and about 80% of general government revenues (including investment income from the Kuwait Investment Authority).
“The stable outlook balances our view of Kuwait’s very strong fiscal and external positions against the uncertainties related to its political system, its undiversified economy, and the lack of transparency regarding government assets,” it added.
“A political consensus that helps to accelerate both domestic and foreign private investment could support transparency and the long-term diversification of the economy, which could eventually be positive for the ratings.”