Moody’s Ratings affirms Kuwait’s A1 rating; maintains stable outlook

Kuwait: Moody’s Ratings (Moody’s) has on Thursday affirmed the Government of Kuwait’s long-term local and foreign currency issuer ratings at A1. The outlook remains stable. The rating affirmation reflects Moody’s assessment that Kuwait’s balance sheet and fiscal buffers will remain extremely strong for the foreseeable future and preserve macroeconomic and external stability.

Balanced against this key credit strength is the lack of progress in reforms that would reduce the vulnerability of the economy and government finances to oil market volatility and long-term carbon transition risks, which reveals underlying and persistent institutional constraints. While the government aims to address the institutional impediments, how effective it will be is highly uncertain at this stage.

The stable outlook reflects balanced risks to the ratings. Progress in economic and fiscal diversification away from hydrocarbons not currently factored into Moody’s baseline assumptions may reduce Kuwait’s exposure to oil price fluctuations and long-term carbon transition. The recent dissolution of parliament and temporary suspension of related constitutional articles aimed at overcoming institutional constraints has the potential to accelerate reforms. By contrast, increasing global momentum towards carbon transition that significantly lowers the demand for and price of oil would likely weigh on Kuwait’s credit metrics and weaken the credit profile in the absence of fiscal and economic reforms.

Kuwait’s local and foreign currency country ceilings have been raised to Aa1 from Aa2. The three-notch gap between the local currency ceiling and the sovereign rating reflects the country’s stable balance of payments through episodes of oil price volatility, against the economy’s exposure to a key revenue source and a challenging domestic political environment that constrains reform and diversification prospects. The zero-notch gap between the foreign currency ceiling and local currency ceiling reflects very low transfer and convertibility risks, given the country’s very large net external creditor position that includes ample foreign exchange reserves held by the central bank.

 

Ratings rationale

Kuwait’s sovereign balance sheet and fiscal buffers will remain extremely strong for the foreseeable future, anchoring the sovereign credit profile. However, lack of progress in reforms that is largely the result of underlying and persistent institutional constraints exposes the government to oil market volatility and long-term carbon transition risks. In the past week the sovereign took the extraordinary step to temporarily suspend parliament for up to four years in an attempt to address the institutional impediments to reform, but building a track record of credible and effective policies is likely to take time.

Moody’s expects Kuwait’s government financial assets (GFA) to remain very large over the coming years. Moody’s estimates that the country’s GFA, which mainly comprise assets in the Future Generations Fund (FGF), exceeded 400 percent of GDP at the end of 2023 – among the highest across rated sovereigns. Since there is no mechanism to transfer funds or income from FGF into the government’s budget or the General Reserve Fund (GRF, the government’s treasury account), Moody’s expects the size of FGF will continue to grow in tandem with global asset prices.

At the same time, Kuwait’s debt burden is extraordinarily low, in part due to the expiration of the previous public debt law in 2017 preventing debt issuance despite some years of sizeable deficits since then. Government debt was less than 3 percent of GDP as of the end of fiscal 2023 (ending March 2024), which is among the very lowest globally and also results in very strong debt affordability. Moody’s assumes that a new law allowing the government to incur new debt will eventually be passed, which will mean a higher debt burden based on the rating agency’s fiscal deficit forecasts of 4-7 percent of GDP over fiscal years 2024-27. That said, the debt burden will remain low and Kuwait’s net asset position will remain very large in the coming years.

Kuwait’s very large fiscal buffers preserve macroeconomic and external stability. Moody’s estimates that Kuwait runs a very large net international investment position because of FGF. The very sizeable stock of foreign assets which also includes foreign exchange reserves at the Central Bank of Kuwait significantly lowers external vulnerability risk by supporting the credibility of Kuwait’s currency basket peg and deterring speculation against the Kuwaiti dinar, even during periods of lower oil prices. In turn, the monetary policy regime – with the currency as the nominal anchor – has been effective in maintaining price stability and limiting inflation volatility.

Counterbalancing these credit strengths, Kuwait is one of the sovereigns most dependent on the hydrocarbon sector. Hydrocarbons account for more than 90 percent of the country’s exports and government revenue, exposing it to fluctuations in oil prices and long-term carbon transition. There has been limited progress in economic and fiscal diversification away from hydrocarbons in large part due to an unproductive relationship between the government and parliament that has thus far impeded reforms.

Rationale for the stable outlook

On the upside, material progress in economic and fiscal reforms (not currently factored into Moody’s baseline assumptions) can have a ripple effect through the economy, raising economic competitiveness from a low base and incentivizing domestic and foreign private investment. Faster implementation of projects can also encourage economic diversification, particularly in industries where Kuwait has demonstrated some potential such as transport and logistics, downstream petrochemicals, data centers, and solar and wind energy. The temporary suspension of parliament provides a window for the government to push through credit-enhancing reforms given the institutional impediments Kuwait has faced, albeit with a risk of undermining the credibility of the country’s institutional and governance framework if not used effectively. On the downside, weakness in global demand or accelerating momentum in carbon transition weighing on oil prices and oil production in Kuwait would weaken the government’s credit profile over time in the absence of fiscal and economic reforms, despite large fiscal buffers.