MARC, a Malaysia-based domestic credit rating institution, has affirmed Kuwait’s foreign currency sovereign rating of AAA with a stable outlook, based on its national rating scale.
The new rating reflects Kuwait’s robust fiscal and external buffers. The country faces rising fiscal and economic pressure due to the impact of the COVID-19 pandemic. In spite of this, the credit outlook remains stable, due to its considerable buffers and year-on-year improvements thus far in the prospects for oil demand and prices.
The country’s sovereign wealth fund, the Kuwait Investment Authority (KIA), has assets under management worth more than $690 billion. Meanwhile, its net international investment position (NIIP) stood at 83.9 percent of GDP in 2020, reflecting its strong external position.
The implementation of fiscal and structural reforms in the country to offset credit risks linked to strong oil dependency has been slow, especially due to weak governance and institutions.
If Kuwait’s ongoing Vision 2035 reform effort becomes successful, it can be expected to reduce the country’s oil dependency and enhance human capital and private sector participation in the economy.
Last year, the downside risks increased after the COVID-19 outbreak led to a fall in global oil demand. The government’s pandemic-related emergency spending response had caused the fiscal deficit to increase to 9.4 percent of GDP. In the same year, GDP had contracted by 8.9 percent.
The political gridlock continues to impede the progress of the draft debt law which would enable public borrowing to meet heightened financing needs. To avoid a liquidity crunch, the government had swapped assets with the Future Generations Fund (FGF) and dipped into the treasury.
The risks to Kuwait’s stable rating outlook over the immediate term include a spike in new infection cases driven by new virus variants and the continuing volatility of global oil demand and consequently prices. If these risks are realized, Kuwait could face further unfavorable macro-financial dynamics ahead.
However, an accelerated vaccination program, together with reaching some reform consensus between the legislative and executive branches, may help to bring down some of the risks to the outlook.
