KUWAIT. Standard & Poor's Ratings Services today affirmed its 'AA/A-1+' long- and short-term foreign and local currency sovereign credit ratings on Kuwait. The outlook is stable.
The ratings on Kuwait are supported by the sovereign's rich resource endowment, which has led to high levels of wealth and enabled it to build very strong external and fiscal balance sheet positions.
The ratings are constrained by our view of Kuwait's underdeveloped private sector, strong dependence on oil revenues, latent geopolitical risks (shared by most peers in the Gulf Cooperation Council), and the lack of transparency regarding government assets. We view the institutionalized impasse between the parliament and government as an impediment to policymaking.
However, we believe that this risk is largely offset by the Kuwaiti population's ability to express its views in a relatively free and open society, thereby reducing the risk of domestic conflict that has been seen elsewhere in the Middle East and North Africa region.
As a percentage of GDP, the general government budget has been in double-digit surplus for almost a decade. We estimate the 2011/2012 budget year--which ended on March 31, 2012--will have a surplus of more than 30% of GDP.
Assuming continued high oil prices and a gradual increase in oil output, we project the general government budget surplus will average similar levels over the next four years.
Kuwait's policy is to put 10% of government revenues into a Future Generations Fund (which is invested in external assets) and the remaining surplus into the General Reserve Fund, both managed by the Kuwait Investment Authority (KIA).
The government's exceptionally large net asset position, which we estimate will reach 237% of GDP by 2015, provides significant support for the ratings. However, disclosure on the size and structure of government's assets is extremely limited, in our opinion, and constitutes a rating weakness.
Kuwait has also posted current account surpluses averaging more than 25% of GDP over 1994-2011, largely due to the strength of oil exports. This, and the government's policy of investing a large portion of its surplus abroad, has seen vast external assets accumulate. Kuwait is likely to record a substantial net external asset position of about 360% of current account receipts (CARs) in 2012.
We estimate Kuwait's liquid external assets will exceed external debt by 283% of CARs in 2012, averaging 318% over the four years to 2015. At the same time, we project that gross external financing needs will remain relatively low, averaging around 40% of CARs plus usable reserves over the next four years.
In our view, political tensions in Kuwait are increasing, particularly since the opposition to the ruling al Sabah family won a majority of the seats in the National Assembly in the February 2012 elections. While power remains concentrated with the emir and his ministers, the opposition can block government legislation and has stalled the country's ambitious four-year development plan aimed at building trade and financial links and improving economic diversification.
Opposition members of the National Assembly are also calling for increased democratization, greater reliance on shariah law, and the nationalization of key industries. While the government remains more focused on development, we view the discord as hampering progress.
We view Kuwait's creditworthiness as susceptible to a sharp and sustained decline in oil prices, with the oil sector accounting for an estimated 30% of real GDP in 2010 (latest available data), 93% of 2011 exports, and about 70% of general government revenues including investment income from KIA). However, we expect oil prices to remain high at above $100 in 2012.
The stable outlook balances our view of Kuwait's very strong fiscal and external positions against its gridlocked political system, undiversified economy, and the lack of transparency regarding government assets.
An improvement in the relationship between the government and the parliament, along with a political consensus that helps to accelerate both private domestic and foreign investment, could support long-term diversification of the economy, which would eventually be positive for the rating.
Conversely, we could lower the ratings if Kuwait's domestic political stability were to deteriorate, if geopolitical risks were to materialize, or the government's asset position were to suffer a significant and sustained erosion.