Fitch affirms Kuwait ‘AA’ rating
Inflation up 1.67 pct in February
KUWAIT CITY, April 8, (KUNA): Fitch Ratings has affirmed Kuwait’s long-term foreign currency issuer default rating (IDR) at ‘AA’ with a stable outlook.
Kuwait’s key credit strengths with exceptionally strong fiscal and external balance sheets. These is increasingly slow pace in addressing growing public finance challenges stemming from heavy oil dependence, generous welfare and large public sector.
Fitch Ratings said in a freshly released report, “We estimate the foreign assets of the Kuwait Investment Authority (KIA) at around $529 billion at the end of the fiscal year ending March 2020 (FY19/20), accounting for the bulk of Kuwait’s sovereign net foreign asset position of 472 percent of GDP (the highest of any Fitchrated sovereign).”
Financial losses in 1Q20 largely erased double-digit gains in 2019. Of the KIA total, the Reserve Fund for Future Generations (RFFG) accounted for around $489 billion and has grown over an extended period, due to investment returns and the statutory annual transfer of 10 percent of government revenue.
Meanwhile, the value of the General Reserve Fund (GRF), which holds the accumulated government surpluses after transfers to RFFG, is estimated to have fallen for the sixth year in a row as the government tapped the GRF for deficit financing and the repayment of domestic maturities.
It added in the report, “We expect a general government deficit of 20 percent of GDP (KD 7.3 billion) for FY20/21, reflecting our baseline assumption that the Brent price will average $35/bbl in 2020 and $45/bbl in 2021.”
On the government’s reporting convention (not including KIA investment income in revenue and treating the RFFG transfer as expenditure), the deficit would be over 33 percent of GDP. “We estimate the fiscal surplus in FY19/20 at around 1 percent of GDP for FY19/20.”
The government’s authorisation to issue debt has expired and it is unable to borrow, even to refinance existing maturities, which currently have to be met out of the GRF. As a result, general government debt fell to 14 percent of GDP at the end of FY19/20. Kuwait’s outstanding eurobonds mature in 2022 and 2027.
It added, “Under our forecasts, the foreign assets of the GRF will be nearly depleted in FY20/21, and we assume that the government will resume borrowing and open up the RFFG for financing starting FY21/22.”
Accessing RFFG assets would allow the deficit to be financed at the FY20/21 level for over a decade, but will require parliamentary approval and will be politically contentious.
The government is currently making a renewed push on the debt law and is not contemplating a change in the framework governing RFFG assets.
The government has made “minimal progress” on its reform programme aimed at boosting its underlying fiscal position, improving the business environment and boosting the role of the private sector as a provider of jobs for a young and growing population of Kuwaiti nationals (80 percent of Kuwaiti citizens were employed in the government sector in 2018). It has focused its efforts on regulatory and administrative measures that do not require approval from Parliament, which in turn is trying to minimise the immediate costs to its constituents of reform.
“We estimate that real GDP growth was around zero in 2019, weighed down by oil production cuts as per the OPEC agreement and delays to refinery upgrades as part of the Clean Fuels Project (CFP).
“In 2020, overall real GDP growth is likely to be positive amid an expansion of oil production and the commissioning of refinery upgrades, although disruptions related to the coronavirus will likely push
the non-oil economy into recession for the year. The banking sector could absorb a rise in problem loans, being adequately capitalised, liquid and profitable.
“We expect Kuwait’s oil output to average to 2.8 million bbl/day in 2020 (from less than 2.7 million bbl/day in 2019). Kuwait has not yet announced an intention to raise oil output, unlike Saudi Arabia and Abu Dhabi, and our forecast increase reflects the restart of production at the Saudi-Kuwait Divided Zone.
“We forecast Kuwait’s current account deficit at 4 percent of GDP in 2020, the first current account deficit in two decades. Kuwait’s bank and non-bank private sectors are net external creditors and major investors in the rest of the region, reflecting relatively muted domestic growth prospects. This supports the current account balance and Kuwait’s net international investment position, which we estimate at 514 percent of GDP in 2018, exceeding the sovereign net foreign asset position by around 50 percent of GDP.”
Kuwait’s fiscal and external metrics are particularly sensitive to changes in oil prices and production. We estimate that a $10/ bbl change in the average oil price from our baseline assumption would shift Kuwait’s fiscal balance by around 9 percent of GDP. An additional 100,000 bbl/day of oil production would impact the fiscal balance by around 1 percent of GDP.
Inflation rates in Kuwait rose by 1.67 percent in February on yearly basis, the Central Statistical Office (CSO) said in a report released on Tuesday.
Benchmark of the first group of commodities (food and beverages) climbed in February by 2.79 percent compared to the same month in 2019.