23/10/2017 15:39 AST
Fitch Ratings-Hong Kong-23 October 2017: Fitch Ratings has affirmed Kuwait's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Kuwait's key credit strengths are the sovereign's exceptionally strong fiscal and external metrics and, at a forecast USD50/bbl, one of the lowest fiscal breakeven Brent oil prices among Fitch-rated oil exporters. These strengths are tempered by Kuwait's heavily oil- dependent economy, geopolitical risk, weak governance and a poor business environment. A generous welfare state and the large economic role of the public sector present increasing challenges to public finances, given robust growth of the Kuwaiti population.
Assets and performance of the Kuwait Investment Authority (KIA) are not disclosed. We estimate that KIA's assets exceeded USD514 billion or 453% of GDP at end-2016. Of this amount, the Reserve Fund for Future Generations (RFFG) accounted for almost USD400 billion and continues to increase, due to investment income and the statutory transfer of 10% of government revenue. Meanwhile, the value of the General Reserve Fund (GRF), which holds the accumulated government surpluses of previous years, is estimated to have fallen for a third year in a row, to USD116 billion, as the government tapped the GRF for financing.
In a hypothetical scenario where fiscal deficits remain at the level expected for the fiscal year ending March 2018 (FY17/18), the transfer to the RFFG continues and the GRF remains the sole source of financing, the GRF would be exhausted within about 10 years, while tapping the RFFG would allow Kuwait to sustain its current deficits for decades.
The government met its FY16/17 financing need by issuing around KWD2.2 billion (USD 7.3 billion) of net new local debt, USD8 billion of eurobonds and taking around USD4 billion from the GRF. We expect the financing mix in FY17/18 to have a similar debt component, although this is conditional on the passage of the new debt law in the National Assembly, doubling the government's borrowing cap to KWD20 billion. Assuming that the law will be passed, we see debt approaching the new cap in FY19/20, when it would be equivalent to 48% of GDP.
We estimate the general government balance at KWD74 million (0.2% of GDP) in FY16/17, including estimated investment income worth around KWD4.7 billion and excluding the statutory transfer of 10% of revenue to the RFFG, worth around KWD1.3 billion. The government does not count investment income and treats the RFFG transfer as an expenditure in its own presentation, resulting in a deficit of more than KWD5.9 billion. The balance in FY16/17 was almost unchanged from FY15/16, as a further 3% drop in oil revenue was offset by a similar decline in current spending. A mild decline in current spending masked significant under-spending relative to the budget (nearly KWD1.2 billion, or 6.3%).
Under our baseline Brent oil price assumption of USD52.5/bbl in 2017-2018, we expect the fiscal balance to be broadly unchanged at KWD57 million (0.2% of GDP) in FY17/18. According to the government's reporting convention, our forecast deficit would be KWD6.4 billion, which roughly corresponds to the government's financing need, as the government does not intend to touch the RFFG. The government's own headline budget deficit is KWD7.8 billion for FY17/18, mainly due to a lower oil price assumption of USD45/bbl.
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