KUWAIT, July 19 (KUNA) -- Standard and Poor's (S&P) kept Friday Kuwait credit rating at (AA) with stable outlook, and said it could raise rating if the Gulf country carried out wide-scale political and economic reforms.
S&P released a report about credit rating of the State of Kuwait regarding rationale behind the rating.
It said Kuwait economy remained dependent on oil which accounts for 90 percent of exports and government revenues, and the country was the world's 8th largest crude oil exporter in 2018.
The agency forecast muted economic growth this year given recent extension of OPEC+ agreement to cut oil production, and only modest non-oil growth providing ongoing geopolitical tension.
OPEC+ is an agreement between OPEC and non-OPEC countries to cut production by over 1.2 million barrels per day (bpd) to push prices higher.
S&P said Kuwait has substantial savings of over 400 percent of Gross Domestic Product (GDP) accumulated within the sovereign wealth fund.
It forecast Kuwait net general government asset position to reach 430 percent of GDP by end of 2019, considered the highest ratio of all rated sovereigns.
Kuwait government surpluses, it anticipated, were set to continue even with lower oil prices ahead, bolstered by investment returns on the sovereign wealth fund assets.
It said Kuwait currency, Dinar, would remain pegged to a US dollar-dominated currency basket.
The agency said the stable outlook reflected expectation Kuwait's public and external balance sheets would remain strong over the next two years, primarily underpinned by sizable foreign assets accumulated in the country's sovereign wealth fund, which would partially offset risks related to Kuwait's undiversified oil-dependent economy.
"We could raise the ratings if wide-ranging political and economic reforms enhanced institutional effectiveness and improved long-term economic diversification, although we think such a scenario is unlikely over the forecast horizon to 2022," it said.
S&P said it could lower Kuwait's rating if it observed a sustained decline in economic wealth, like due to a fall in oil prices, materially weaker economic growth rates or if regional geopolitical risks escalate significantly.
The agency said ratings on Kuwait remained supported by high levels of accumulated fiscal and external buffers.
The ratings are constrained by concentrated nature of the economy and relatively weak institutional settings compared with those of non-regional peers in the same rating category.
Kuwait, it noted, derived around 55 percent of GDP, more than 90 percent of exports, and about 90 percent of fiscal receipts from hydrocarbon products, making Kuwait's economy undiversified.
Extension of OPEC+ agreement constrained short-term growth but higher oil prices offset a broader impact, it said.
The agency said Kuwait was the world's 8th largest crude oil producer in 2018 and the 7th largest oil reserves. Kuwait, on a per capita basis, is the world's largest producer with total proven oil reserves equivalent to about 100 years.
Kuwait economic performance will remain largely determined by oil industry trends, said S&P. "We currently forecast headline growth at 1.5 percent in 2019," backed by OPEC's decision to extend production cuts.
OPEC+ agreement was implemented in January 2019 for an initial period of six months but has now been extended until March 2020. S&P expected Kuwait oil production to average about 2.7 million bpd compared with 2.8 million bpd originally planned and included in the government budget.
OPEC+ agreement contributed to higher oil prices, it said, with Brent averaging USD 60 pb over remainer of 2019 and 2020 before reducing to USD 55 pb, while higher oil prices would underpin Kuwait's larger fiscal and current account surpluses through 2020.
S&P expected growth rates in Kuwait to accelerate to an average 2.5 percent over 2020-22, based on forecast OPEC cuts would discontinue beyond March 2020. Kuwait planned expansion of oil output capacity, a potential restart of production within Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia, as well as multiple government investment projects would improve income.
S&P said despite "somewhat" stronger institutional arrangements, Kuwait's structural reforms efforts have generally lagged those of other regional economies in recent years. Unlike Saudi Arabia, the UAE and Bahrain, Kuwait still has not introduced the valued added tax (VAT).
"We understand that the government is exploring introducing excise taxes first, although the timeframe remains unclear and much remains to be done in terms of capacity building," it said.
The new debt law has also faced persistent delays and the agency no longer expected it to be approved in 2019 with the parliament in recess. "Without the debt law, the authorities are not able to issue new debt and have to rely on asset drawdowns to fund deficit at the central government level," said S&P.
It added regional geopolitical tensions would negatively impact Kuwait's economy with trade routes in the Arabian Gulf at risk especially at Strait of Hormuz.
Despite forecast of a reduction in oil price in 2021 to USD 55 from USD 60, said S&P, Kuwait would continue to post general government surpluses averaging eight percent of GDP over medium term.
The rating agency did not expect any debt issuance as the new debt law has not been passed yet, thus the government would continue to rely on asset drawdowns from the General Reserve Fund (GRF) to finance government deficit.
It expected Kuwait's current account to remain in surplus over the next two years, turning to only modest deficit from 2021.
Kuwait is more flexible than the foreign exchange regimes in most other GCC countries that maintain a peg to the US Dollar alone. This is evident, for example, in Kuwait Central Bank's decision to hike key interest rate only once compared with four US Federal Reserve hikes last year.
S&P underlined that Kuwait banking sector remained resilient with stable profitability and improved asset quality. Concentration in commercial real estate segment remains a key credit risk for banks. (end) fnk.bs