 Fitch Ratings has downgraded Kuwait’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “AA-” from, “AA”, and the outlook is stable.
The downgrade reflects ongoing political constraints on decision-making that hinder addressing structural challenges related to heavy oil dependence, a generous welfare state and a large public sector, the global rating agency said in its online report.
There has been a lack of meaningful underlying fiscal adjustment to recent oil-price shocks and the outlook for reforms remains weak despite some positive political developments as part of a national dialogue, it said, expecting a debt law to be agreed in 2022.
Even without a debt law, the Kuwaiti government would still be able to meet its financing obligations, relying on the assets of the General Reserve Fund (GRF) – the government’s treasury account – to meet gross financial needs until new financing arrangements are secured, it added.
Kuwait’s fiscal and external balance sheets remain among the strongest of Fitch-rated sovereign despite several oil-prices swings since 2014 and intermittent political gridlock, it pointed out.
It estimated Kuwait’s sovereign net foreign asset positions at more than 500 percent of GDP, the highest among all Fitsch-rated sovereigns and 10x the “AA” median, expecting it to fall to 10 percent of GDP in the fiscal year ending March 2022 (FY21) against a “AA” median of 47 percent although government debt is likely to rise to 50 percent of GDP over the medium term.
The general government budget deficit is expected to narrow to 1.6 percent of GDP in FY21 from 20.6 percent of GDP in FY20 largely due to higher oil prices, it noted.
The budget deficit would be 10 percent of GDP under the government’s reporting convention, which excludes the investment income from revenues, followed by deficits averaging 12 percent of GDP in FY22-FY23, it said.
Persistently high oil prices would lower financing needs as budget outcomes are sensitive to changes in oil prices and production, according to the rating agency.