Kuwait Ratings Affirmed At ‘AA/A-1+’; Outlook Stable
On July 20, 2018, S&P Global Ratings affirmed its ‘AA/A-1+’ long- and short-term foreign and local currency sovereign credit ratings on Kuwait. The outlook is stable.
The stable outlook reflects our expectation that Kuwait’s public and external balance sheets will remain strong over the next two years, backed by a significant stock of financial assets.
We expect these strengths to offset risks related to volatile oil prices, Kuwait’s undiversified economy, and rising geopolitical tensions in the region.
Kuwait derives around 55% of GDP, more than 90% of exports, and about 90% of fiscal receipts from hydrocarbon products.
Economic activity to pick up over the next four years after contracting in 2017.
Oil spending returns
We expect rising oil production from the second half of 2018 and public investment to drive real GDP growth of 2.8% on average over 2018-2021.
Domestic politics remains contentious, with strong parliamentary opposition to fiscal austerity.
We assume oil prices (Brent) will average US$65 per barrel (/bbl) in 2018, before falling to $60/bbl in 2019 and $55/bbl over 2020-2021
Kuwaiti crude oil trades at about a $5 discount to Brent.
Despite higher oil prices of $55/bbl in 2017 relative to the previous year, Kuwait experienced a large contraction in real GDP growth of 2.9%. The decline was mainly due to a 5% decrease in oil production implemented under the Organization of the Petroleum Exporting Countries (OPEC) agreement.
We expect growth to return to positive territory in 2018 on the back of some recovery in oil production expected in the second half of the year (following an agreement reached by OPEC on June 22, 2018), and steady public spending on infrastructure projects.
Higher oil prices in 2018-2019 and the delay of the introduction of value-added tax (VAT) will also likely support private and public consumption.
Over the medium term, we anticipate that Kuwaiti oil output will rise to over 3 million barrels per day (bpd) by 2020, from around 2.7 million bpd currently.
Kuwait Petroleum Corporation plans to raise oil production capacity to 4 million bpd by 2020.
This ambitious target would be supported by recent news that Kuwait and Saudi Arabia plan to resume oil production at their shared neutral zone from 2019. Production at the jointly operated Khafji and Hout oil fields was suspended in 2014.
Graphs courtesy of S&P
Although the tendering process of several public-private partnership (PPP) projects had stalled in 2017, we understand that the authorities plan to award two PPP projects this year–a waste treatment project and a sewage plant.
The government intends to divest underutilized assets and privatize around 40 assets over the next 25 years. It is currently studying the feasibility of privatizing the North Shuaiba power plant, fixed line and broadband telecoms infrastructure, the Ministry of Electricity and Water Central Workshop, and the national stock exchange.
Lower oil prices since 2014 have caused Kuwait’s central government balance to remain deep in deficit (having been in surplus in the fiscal year ended March 31, 2014, or fiscal 2013).
During fiscal 2017, we estimate that the central government deficit narrowed to 14.6% of GDP, from close to 18% in fiscal 2016, owing to higher oil revenues.
We estimate that temporarily higher oil prices in 2018 will support a further reduction in the deficit to 10.6% of GDP in fiscal 2018.
Taxes, revenues, and expenditures
The government plans to further postpone the implementation of
VAT from 2019 due to a delay in parliamentary approval. Instead, we expect the government to focus on moderating expenditure growth by somewhat limiting new employees in the public sector, strictly enforcing current welfare policies to reduce overspending, and charging nominal fees to cover the cost of providing services to its citizens. The authorities also plan to introduce excise taxes on certain goods in 2019, subject to parliamentary approval.
During fiscal 2017, we estimate that Kuwait ran a fiscal surplus of 8% of GDP. We anticipate that recurrent investment income will allow the general government budget to remain in surplus over the forecast horizon, with the surplus averaging more than 10% of GDP over fiscal 2018-2021.
Kuwait issued its first sovereign international bond of $8 billion
in 2017, and will likely continue to tap external bond markets given current favorable rates, particularly compared with external asset returns.