Mubasher: Fitch Ratings maintained Kuwait's long-term foreign-currency issuer default rating (IDR) at 'AA' with a stable outlook.
The GCC nation’s robust fiscal and external balance sheets are significantly counterbalanced its “institutional paralysis and slow pace in addressing growing public finance challenges stemming from heavy oil dependence, a generous welfare state and its large public sector,” the international ratings agency said in a statement on Tuesday.
The foreign assets of the Kuwait Investment Authority (KIA) are estimated at $529 billion at the end of the fiscal year ended in March 2020, representing 472% of gross domestic product, the highest of any Fitch-rate country.
In addition, the value of the General Reserve Fund (GRF) is forecast to have dropped for the sixth successive year after the government resorted to the GRF to finance its budget deficit and repay domestic debts.
Budget deficit
The GCC nation’s budget deficit is expected to stand at 20% of GDP (KWD7.3 billion) for fiscal year 2020/2021. This reflects the global ratings agency’s baseline assumption that the Brent price will average $35 per barrel (pb) and $45 pb in 2020 and 2021, respectively.
“The government is unlikely to be able to mount a significant fiscal policy response to the oil shock given the ongoing pandemic and parliamentary elections in October 2020.”
As being reported by the government (not including KIA investment income in revenue and treating the Reserve Fund for Future Generations (RFFG) transfer as expenditure), the deficit is forecast to exceed 33% of GDP. The fiscal surplus is expected to reach nearly 1% of GDP for FY19/20.
“The government's authorisation to issue debt has expired and it is unable to borrow, even to refinance existing maturities, which currently have to be met out of the GRF.”
Therefore, government debt dropped to 14% of GDP at the end of FY19/20. It is noteworthy to mention that the maturity dates of Kuwait's outstanding eurobonds are in 2022 and 2027.
Deficit financing through GRF
“Under our forecasts, the foreign assets of the GRF will be nearly depleted in FY20/21, and we assume that the government will resume borrowing and open up the RFFG for financing starting FY21/22.”
“Accessing RFFG assets would allow the deficit to be financed at the FY20/21 level for over a decade, but will require parliamentary approval and will be politically contentious.”
Oil output
Kuwait's oil output is expected to average to 2.8 million barrels per day (bpd) in 2020, compared to less than 2.7 million bpd in 2019.
A $10 bp change in the average oil price from Fitch’s baseline assumption is expected to shift the country’s fiscal balance by about 9% of GDP. An additional 100,000 bpd of oil production would affect the fiscal balance by nearly 1% of GDP.
The country’s current account deficit is expected to record at 4% of GDP in 2020.
