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Kuwait has exceptional fiscal strength: Fitch – At 8.3 percent of GDP, debt is among the lowest

KUWAIT: With an exceptional fiscal strength, Kuwait has one of the lowest breakeven oil prices among Fitch-rated oil-exporting countries, said Fitch Ratings, one of the world’s most recognized credit rating agencies. At a forecast 463 percent of GDP, its forecast end-2015 sovereign net foreign asset position is the largest of any Fitch-rated sovereign, noted the New York-based agency in its expanded report on Kuwaiti economy. At 8.3 percent of GDP, debt is among the lowest. Forecast fiscal and external surpluses will continue to add to the country’s existing buffers, if at a lower rate than historically, the report added.

“We forecast that the current account surplus will fall to five billion dollars (4.1 percent of GDP) in 2015, interrupting a history of double-digit surpluses since 1999. We expect the current account balance to edge down further before returning to double digits in 2017, as the domestic economy picks up while oil prices languish. Both the private and public sectors are net external creditors.” Terming the fiscal surpluses as “dented,” the agency said: “Under our baseline oil price assumptions, we expect the general government to maintain a surplus of KD 1.8 billion (4.9 percent of GDP) in FY ’15, down from KD eight billion in FY ’14, including investment income, but before transfers to the sovereign wealth fund. This is driven almost entirely by a fall in oil-related receipts.”

Current spending cut
On current spending cut, the report said that in response to the deterioration in revenues, the government is implementing cuts to current expenditure as per its FY ’15 budget passed in July. Goods and services expenditure was down 50 percent and subsidy payments have fallen as a result of the lower oil prices in the first six months of the FY; the wage bill has remained roughly unchanged. As for capital spending maintained, the report expected government capital spending to rise to KD2.2 billion in FY15 from KD 1.8 billion in FY ’14. “Capital spending is budgeted higher than last year, and implementation has been on an improving trend since FY ’11, reflecting a more stable political environment and the government’s commitment to its KD 32.4 billion development program,” it said.

Addressing structural weaknesses, the report noted that most structural indicators are weaker than for peers. “Doing Business, Human Development and World Bank governance indicators are below the ‘AA’ and GCC medians. Geopolitical risk affects the whole region.” With the economy heavily dependent on oil, which accounts for around 50 percent of GDP, and 60-70 percent of fiscal and external revenues, a limited economic policy toolkit restricts the authorities’ ability to respond to severe oil price volatility, it said.

Rating sensitivities
As for rating sensitivities and its relation to structural change, the report pointed out that ratings could benefit from improvements in structural weaknesses, such as a reduction in oil dependence or a strengthening of the business environment, governance and economic policy framework. “A further, sustained fall in oil prices could negatively affect the ratings, although the low breakeven oil price and substantial fiscal and external buffers provide significant flexibility,” it said.
Regarding local currency rating, the Long-Term Local-Currency IDR is ‘AA,’ the same as the Foreign-Currency IDR. The bulk of government revenues and a large amount of sovereign assets are denominated in USD. “Kuwait’s substantial external financing flexibility means it has little need for domestic finance,” it noted, adding that the country ceiling is ‘AA+’, one notch above Kuwait’s Foreign-Currency IDR, reflecting low transfer and convertibility risk, with few restrictions on capital movements.

Fitch expects the Brent oil price to average USD 55/b in 2015 and 2016 and USD 65/b in 2017, down from USD 65/b in 2015 and USD75/b in 2016 at the time of the previous review. Nevertheless, “we still see Kuwait’s fiscal and external position as exceptionally strong, with vast accumulated savings, and fiscal and external breakeven Brent prices estimated at USD 48/b and USD 50/b, respectively, for 2015.”

It carried on saying that Kuwait has “ample assets to cover medium-term spending needs.” Kuwait’s parliament passed the FY15 budget in July 2015 at an oil price assumption of USD 45/b and budget plans for a deficit of KWD 8.2 billion, it said, noting that the budget envisages a “drop in oil and other revenues of 40-50 percent compared with FY14 outturns, and a 10-20 percent reduction in all current spending except wages and salaries (which are planned slightly higher than in FY14, although lower than in the FY14 budget). Budgeted capital spending remains almost unchanged from last year’s budget, and is planned 27 percent higher than last year’s outturns.”

Identical decline
The report continues that in the first six months of 2015, revenues of Kuwait fell by 45 percent yoy relative to last year’s outturns, mirroring an identical decline in oil revenues. Expenditures have dropped by more than 20 percent, driven by sharp falls in expenditure on goods and services and in miscellaneous expenditure items. By contrast, it argued, capital spending is increasing and compensation expense is roughly constant. “The drop in non-oil revenues is largely driven by the postponement (with the consent of Kuwait) of Iraq’s payments into the UN Compensation Fund until 2017.” There are around KD 1.4 billion of payments remaining, which could be settled in 2-3 years.

“The government is considering fiscal reforms for implementation for the FY16 budget. These include the introduction of VAT and a business profit tax, an expenditure cap below forecast FY15 levels, and a reform that would standardize pay across the public sector and constrain growth of the government wage bill. The authorities are also considering a gasoline subsidy reform for implementation in early 2016, following partial elimination of diesel and kerosene subsidies in early 2015,” noted the report.

However, it said, implementation of capital spending has continued to improve in the first six months of FY15, with the share of the FY budget spent in the first six months 5pp higher in FY15 than in the past five years on average. This continues a trend of rising implementation since FY11, “and our forecast implies that spending over the whole of FY15 will be 95 percent of what had been budgeted.

Finally, the report expected non-oil growth to be two percent in 2015 and accelerate to four percent in the years beyond, after an increase of 1.2 percent in 2014. “Capital spending will contribute more than half of overall growth. Consumption will also be a steady contributor. Growth of bank credit to the private sector had moderated to 4.3 percent in September 2015, from an average of sic percent in the previous year, and the value of local ATM and POS transactions in 3Q15 was up 10 percent yoy in 3Q15.” – KUNA

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