KUWAIT: S&P International Rankings revised its outlook on Kuwait to steady from unfavourable and affirmed the ‘A+/A-1’ long- and short-term foreign- and local-currency sovereign credit score scores. The switch and convertibility evaluation stays at ‘AA-‘.
The steady outlook primarily displays the favorable oil worth and home manufacturing prospects over the following two years. It’s also based mostly on our expectations that Kuwait will implement further fiscal financing mechanisms on high of withdrawals from the federal government’s fundamental treasury buffer, the Common Reserve Fund (GRF). This might, for instance, embrace unblocking longstanding constraints on borrowing, by introducing a brand new debt legislation, which might permit a wider vary of financing choices when fiscal deficits re-emerge at a future time.
Draw back state of affairs
We might decrease the score if no sustainable complete financing preparations are agreed over the following two to a few years. This might occur, as an example, due to ongoing tensions between the federal government and parliament rendering the federal government unable to implement fiscal reforms, move the debt legislation, or authorize different obligatory budget-financing mechanisms.
We might additionally decrease the score if we concluded that the federal government wouldn’t have full prepared entry to the Future Generations Fund (fundamental portion of Kuwait’s sovereign wealth fund; FGF) for budgetary and debt reimbursement wants, opposite to our present assumption.
Upside state of affairs
We might elevate the score if the federal government efficiently carried out a complete structural reform package deal aimed toward bettering fiscal financing mechanisms, diversifying the economic system and decreasing the non-oil deficit. We view this state of affairs as unlikely over the following two to a few years.
The outlook revision to steady primarily displays a major additional enhance within the worth of oil (Kuwait’s key export merchandise) in latest months, which we count on to be sustained till a minimum of the tip of 2023. Though we nonetheless count on oil costs to common $55 per barrel (/bbl) from 2024, we challenge a mean oil worth of simply above $100/bbl for 2022 and $85/bbl for 2023. We estimate that at present spending ranges, an oil worth of round $75-$80 balances Kuwait’s fiscal books.
Moreover, OPEC+ manufacturing quotas are persevering with to ease, with Kuwait rising oil sector output, which additionally helps fiscal income and financial development. We take into account that these favorable phrases of commerce developments will permit Kuwait to beat previous fiscal financing pressures in place throughout 2020-2021. Kuwait has beforehand confronted liquidity constraints since liquidity on the authorities’s fundamental treasury buffer, the GRF, had diminished considerably by the tip of final yr whereas different financing preparations, such because the passage of debt legislation permitting the federal government to borrow or authorization to withdraw sources from the a lot bigger FGF weren’t in place.
We estimate that the GRF is being replenished on the present oil costs and the cumulative fiscal surplus over 2022-2023 ought to permit Kuwait to cowl the deficit we forecast for 2024 and a part of 2025. Past the projected fiscal deficits over 2024-2025, Kuwait faces restricted authorities financing wants over the forecast horizon by 2025.
Following the reimbursement of a $3.5 billion Eurobond in March, Kuwait’s common authorities debt now stands at simply 3.5 p.c of GDP. We count on Kuwait’s curiosity expenditure to stay low over the following 4 years, amounting to beneath 1 p.c of income on common. The outlook revision and affirmation are additionally based mostly on our base-case state of affairs that Kuwait will undertake measures diversifying its sources of fiscal financing over the following two to a few years. With out further reforms, corresponding to passage of the debt legislation, authorization to extra readily entry the FGF or optimizing public sector spending, fiscal deficits are set to return by 2024 with Kuwait doubtlessly returning to GRF depletion as soon as once more.
We forecast Kuwait’s economic system will develop by 8 p.c in 2022, adopted by 5.5 p.c in 2023, totally on account of rising oil manufacturing as OPEC+ cuts are discontinued. Tensions between the federal government and parliament stay elevated, as prior to now, leading to coverage paralysis and lack of structural reform implementation. Nonetheless, we count on that over the following two years the authorities will undertake measures diversifying Kuwait’s sources of financing, such because the debt legislation, both through parliamentary vote or by a decree issued by HH the Amir.
Kuwait’s economic system relies upon closely on oil, which makes up an estimated 90 p.c of exports and authorities income. The oil sector instantly constitutes almost 50 p.c of the nation’s GDP and much more if we take oil-related actions under consideration. Consequently, Kuwait is ready to notably profit from the at present favorable phrases of its commerce. We count on oil costs to common $102/bbl this yr, adopted by $85/bbl in 2023 and $55/bbl from 2024. In parallel, Kuwait’s oil output has been rising consistent with OPEC+ manufacturing cuts being regularly phased out.
Kuwait’s oil manufacturing averaged 2.4 million bbl per day (mmbpd) in 2021 and we count on it’ll rise to 2.75 mmbpd in 2022 and three mmbpd in 2023, remaining in compliance with OPEC+ agreements. Kuwait can also be aiming to extend oil manufacturing to three.5 mmbpd by 2025. That is based mostly on further investments to extend output at current fields, in addition to fuller use of the partially idle manufacturing throughout the Partitioned Impartial Zone with Saudi Arabia. It isn’t sure whether or not these targets will probably be efficiently met as early as 2025, however we nonetheless count on manufacturing to extend additional to three.1 mmbpd in 2024 and three.2 mmbpd in 2025 from the present ranges.
We take into account that home pandemic-related dangers have successfully abated. Kuwait has vaccinated about 85 p.c of the inhabitants and all earlier inside restrictions have been lifted, which helps financial exercise within the non-oil sector. General, we now challenge financial development at 8 p.c this yr and 5.5 p.c in 2023, primarily on account of rising oil output. We count on this to be adopted by extra modest development charges of round 2 p.c over 2024-2025.
Past the favorable financial setting for Kuwait within the close to future, its structural reforms proceed to persistently lag friends’. Other than Qatar, Kuwait stays the one nation within the Gulf Cooperation Council (GCC) that has nonetheless not carried out value-added tax (VAT), whereas reducing spending is troublesome politically, given that the majority represents public sector wages and subsidies.
With at present favorable oil costs and rising oil manufacturing volumes, we estimate that the GRF is being replenished. We forecast Kuwait’s common authorities funds will probably be in surplus of 11.5 p.c of GDP in 2022, adopted by a 6.3 p.c of GDP surplus in 2023.
The extra liquidity amassed over 2022-2023 ought to permit Kuwait to cowl the fiscal deficit in 2024 and a part of 2025. We forecast a common authorities deficit of about 14 p.c of GDP yearly in 2024-2025 in opposition to our expectations. Reviews of late funds to public entities and suppliers emerged at first of this yr, indicating liquidity pressures on the GRF. We perceive that the federal government is at present taking measures to settle these and, amid stronger fiscal efficiency, we count on this challenge will probably be addressed by the tip of 2022.
Mirroring its sturdy authorities asset place, Kuwait’s balance-of-payments place can also be strong and helps the sovereign score. We estimate that at year-end 2021 its internet exterior creditor place was equal to about 480 p.c of GDP, which is among the many strongest of all rated sovereigns. We estimate that Kuwait posted a present account surplus in 2021 of 21 p.c of GDP, supported by recovering oil costs and manufacturing volumes, in addition to major revenue receipts from managing the sizable inventory of KIA property.
We forecast the present account surpluses will common 30 p.c of GDP over 2022-2023 earlier than regularly diminishing to five percent-7 p.c of GDP over 2024-2025. We count on Kuwait’s change charge will stay pegged to an undisclosed basket of currencies. This basket is dominated by the US greenback, the forex wherein most of Kuwaiti exports are priced and transacted. Though this financial regime has served Kuwait nicely prior to now, we notice that it constrains the nation’s skill to conduct an impartial financial coverage to assist cushion in opposition to fluctuations within the financial cycle. The native forex debt market can also be much less developed than that of equally rated friends. Just like developments in different international locations, inflation has been rising in Kuwait and we challenge it’ll common 4 p.c in 2022. That is nonetheless notably decrease than in most developed and rising markets.
The distinction is primarily defined by sizable authorities subsidies, significantly for power, which has been among the many key components driving inflation up elsewhere. Throughout the Kuwaiti banking sector, nonperforming loans (NPLs) had been low getting into the pandemic in 2020. Banks’ excessive provisioning buffers allowed them to put in writing off exposures with manageable adversarial results on earnings and asset high quality. We now count on NPLs and value of threat to regularly normalize on the again of a extra supportive financial setting. We additionally count on that greater rates of interest will help banks’ profitability.