ShareRating agency Moody's affirms Aa2 rating
KUWAIT: Moody's Investors' Service yesterday changed the rating outlook on Kuwait from 'negative to stable'. Concurrently, the long-term issuer rating has been affirmed at Aa2. According to its Global Credit Research issued late last night, Moody's decision to change the outlook to stable from negative reflects Moody's view that there are sufficient signs of Kuwait's government's institutional capacity to effectively implement its fiscal and economic reform program to preserve creditworthiness in the medium-term, which has the stated objective of diversifying and enhancing the economic base and its budgetary revenues.
The affirmation reflects Moody's view that, despite Kuwait's slower fiscal and economic reform progress relative to other highly-rated peers in the Gulf in response to lower oil prices, the sovereign's extraordinarily strong balance sheet, very high wealth levels and vast hydrocarbon reserves continue to support a credit profile that remains consistent with an Aa2 rating.
Moody's report says that Kuwait's long-term and short-term foreign-currency bond and deposit ceilings remain unchanged at Aa2 and Prime-1, respectively. Kuwait's long-term local-currency country risk ceiling also remains unchanged at Aa2. The decision also reflects Moody's view that Kuwait's institutional strength has improved to a degree that will help limit downside risks to the rating. In addition, fiscal performance in the past fiscal year proved slightly stronger than expected at the time of the last rating action.
Positive fiscal reform steps undertaken by the Kuwaiti government so far include the establishment of a debt management unit at the Ministry of Finance (MoF) and improved coordination between key institutions such as Kuwait Investment Authority (KIA), MoF and Central Bank of Kuwait (CBK). Some fuel subsidy rationalization was implemented in 2016, and implementation of additional excise taxes on harmful items, as well as further utility tariff reforms are likely to happen in the second half of 2017.
Preparation to implement a medium-term budget framework supports this view. The proposed framework will cover a three-year rolling period and involves different entities in the budgeting process, such as Kuwait Petroleum Corporation, the Civil Service Commission, the Secretary General of the Supreme Council for Planning and Development, CBK, and the MoF.
Furthermore, the Kuwaiti authorities have signaled a renewed willingness to increase transparency with regard to government financial assets. The successful Eurobond issuance earlier in the year supports improved transparency and institutional development. Finally, implementation of projects under the current five-year National Development Plan is progressing better than under previous plans, which supports the economic growth outlook.
The decision to affirm Kuwait's Aa2 rating is driven by the government's very strong net asset position, which will persist despite ongoing debt issuance expected over the coming years. Given Kuwait's extraordinarily large hydrocarbon reserves, low oil production costs, its low fiscal and external breakeven oil prices, and Moody's expectation of oil prices remaining between $40-$60 per barrel over the coming 2-3 years, the rating agency thinks that Kuwait's credit profile will retain its key strengths, despite a more gradual reform pace than some of its peers in the region.
Moody's also notes that, despite the sharp economic contraction, Kuwait's GDP per capita-estimated by the International Monetary Fund (IMF) at $71,887 in purchasing power parity terms in 2016 -remains extremely high by international standards, and that this level of wealth continues to provide a significant economic buffer in terms of social stability.
Going forward, Moody's expects Kuwait's government debt to rise to about 34 percent of GDP by 2020, as the government will increasingly use debt issuance as a source of funding its expenditures. At these levels, Kuwait's government debt ratio would remain below the Aa-rated median, and Kuwait's government debt affordability indicators would remain significantly stronger than those of most Aa-rated peers. For instance, government debt as a share of revenues would be around half, and interest payments as a share of government revenues would be around a third of the Aa-rated median.
Furthermore, Moody's expects that the total assets managed by KIA at the end of the forecast period will continue to dwarf accumulated debt. Given the low external breakeven oil price, which the IMF projects at $43 per barrel in 2017 and $44 in 2018, Moody's forecasts a return of current account surpluses of around seven percent of GDP on average in 2017-18, following a deficit of 4.8 percent in 2016. External debt levels will remain broadly stable at around 40 percent of GDP, and the projected recovery in foreign exchange reserves will support Kuwait's strong external liquidity position.
The stable rating outlook signals that upward and downward pressures for Kuwait's rating are balanced, the report pointed out. Steady diversification of government revenues and economic activity away from the oil sector could apply upwards pressure on the rating. Additionally, sustained improvements to the institutional framework, in particular in government transparency and reporting standards, would support Kuwait's sovereign credit profile, it concluded.
Meanwhile, the Ministry of Finance said yesterday that changing Kuwait rating outlook came out of the agency's conviction of the Kuwaiti government's commitment to economic reform. "The government will continue with its reform efforts on all levels, nonetheless in financial and economic spheres," Ministry spokesman Abdulmohsin Al-Tayyar said.- Agencies
