Kuwait's fis­cal pru­dence pays off

The Pak Banker - - OPINION - Jasim Ali

Kuwait's strong fis­cal and ex­ter­nal ac­counts are be­hind the coun­try's em­i­nently favourable credit rat­ings, with Stan­dard & Poor's re­cently con­fer­ring a long-term rat­ing of AA.

The rat­ing agency is par­tic­u­larly pleased with Kuwait's con­tin­ued abil­ity in post­ing steady sur­pluses. It es­ti­mated a bud­getary sur­plus of 30 per cent of gross do­mes­tic prod­uct (GDP) for the fis­cal year end­ing March 2015. (Kuwait's bud­getary process runs from April to March.) Un­doubt­edly, the size of the sur­plus is ex­cep­tional in nor­mal con­di­tions, let alone dur­ing the time of rel­a­tively low oil prices. The oil sec­tor ac­counts for 90 per cent of to­tal ex­ports, 80 per cent of state rev­enues and 60 per cent of nom­i­nal GDP.

The sta­tis­tics con­firm the Kuwaiti econ­omy is more de­pen­dent on oil than any other GCC coun­try. How­ever, it has de­vel­oped a history of over­es­ti­mat­ing planned ex­pen­di­tures and un­der­es­ti­mat­ing rev­enues. This phe­nom­e­non re­flects lo­cal pol­i­tics, in ef­fect lim­it­ing the de­sires of the coun­try's strong leg­isla­tive body.

Par­lia­men­tary mem­bers in Kuwait are known for press­ing the author­i­ties to keep ex­tend­ing fresh grants to na­tion­als, os­ten­si­bly for po­lit­i­cal pur­poses. Thereby, bud­geted fig­ures show­ing rel­a­tively high ex­pen­di­tures and low rev­enues place brakes on the spe­cific de­mands of the politi­cians.

The gov­ern­ment pre­pared the bud­get for fis­cal year 2015-16 with pro­jected rev­enues of $40.7 bil­lion and ex­pen­di­tures of $64.5 bil­lion, thereby sug­gest­ing an ex­tra­or­di­nary short­fall. Yet, a con­ser­va­tive oil fig­ure of $45 per bar­rel was used for cal­cu­lat­ing oil rev­enues.

Put another way, the sta­tus of Kuwait's public fi­nance is partly cred­ited for the favourable im­age con­cern­ing the econ­omy at large. A re­cently-re­leased re­search pa­per by Deutsche Bank projects a break even point of $47.5 per bar­rel for Kuwait's cur­rent fis­cal year. This is the low­est within the GCC, no­tably when com­pared to that of $118.7 per bar­rel for Bahrain.

Both the rat­ing agen­cies Moody's and Fitch ex­tend sat­is­fac­tory rat­ings to Kuwait - Aa2 and AA, re­spec­tive- ly. In fact, the three lead­ing rat­ing agen­cies have one thing in com­mon with re­gards to Kuwait, namely that of grant­ing it a sta­ble out­look.

Un­der­stand­ably, rat­ing agen­cies de­rive com­fort from the coun­try's sub­stan­tial sov­er­eign wealth fund (SWF). Kuwait boasts a sub­stan­tial re­serve that pro­vides the nec­es­sary cush­ion for stake­hold­ers like cred­i­tors and ex­porters. The sov­er­eign wealth fund, as man­aged by Kuwait In­vest­ment Au­thor­ity, stood at $592 bil­lion in June, ranked among the top in the world as es­ti­mated by the Sov­er­eign Wealth In­sti­tute.

Gen­eral re­serves have re­ceived a ma­jor boost over re­cent years af­ter a de­ci­sion to raise fund­ing set aside as part of the man­date for the fu­ture. In 2013 - or be­fore the drop in oil prices - a de­ci­sion was made to in­crease the amount set aside - 25 per cent rather than 10 per cent of oil rev­enues. Another source of strength for Kuwait con­cerns its oil pro­duc­tion ca­pac­ity. Out­put is pro­jected to rise to 3.5 mil­lion bar­rels per day, up from nearly 3.2 mil­lion bar­rels per day. The BP's 'Sta­tis­ti­cal Re­view of World Energy', re­leased in June, es­ti­mates Kuwait's oil re­serves at just above 100 bil­lion bar­rels. This trans­lates into 6 per cent of the world's proven oil re­serves and the sec­ond high­est within the GCC af­ter Saudi Ara­bia.

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