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30 March 2020

S&P Global downgrades Kuwait’s sovereign credit rating on lower oil prices

Lower oil prices in 2020 and 2021 will have negative economic and fiscal implications for Kuwait, given the country's high reliance on hydrocarbon exports

Kuwait is also yet to pass a revised debt law authorising the government to borrow/Shutterstock

by Kudakwashe Muzoriwa

S&P Global has downgraded Kuwait’s long-term sovereign credit to ‘AA-‘ from ‘AA’ with a stable outlook due to a sharp drop in oil prices and the country’s slow reform momentum, which has generally lagged that of its Gulf neighbours in the recent years.

Oil prices plummeted following the Organisation of Petroleum Exporting Countries’ (OPEC) failure to agree on a proposed reduction of 1.5 million barrels per day (bpd) to address an expected significant drop in global demand partly due to the spread of the coronavirus.

The proposed oil production curbs were in addition to the current 2.1 million bpd production decrease set to expire at the end of March 2020

 “The stable outlook reflects the balance between risks from Kuwait’s high reliance on the hydrocarbons sector and delays to structural reforms, against the country's sizable accumulated fiscal and balance-of-payments buffers, which provide the authorities policy space to manoeuvre over the short to medium term,” said S&P Global.

Beyond the direct impact of low oil prices, Kuwait’s economic prospects remain vulnerable to a sharp global economic downturn and around 80 per cent of the country’s oil exports are destined for Asia, where several countries have been substantially affected by COVID-19 outbreak, leading to a contraction in oil demand.

Furthermore, the outbreak of COVID-19 will likely have a significant impact on Kuwait’s domestic economy directly, constraining growth in non-oil sectors. Kuwait has recorded close to two hundred cases of COVID-19 to date and the government ordered businesses to shut down for several weeks.

S&P Global expects Kuwait’s economic growth to remain negative over the medium term, and a $22,000 GDP per capita in 2020 down from almost $29,000 a year earlier.

According to S&P Global, although Kuwait remains a wealthy economy, the rating agency’s forecast represents a material downward revision of relative income levels and consequently the country's aggregate debt-bearing capacity.

Moreover, Kuwait’s reform momentum has generally lagged that of its Gulf neighbours in recent years. The introduction of a five per cent value-added tax has long been delayed, while reforms to diversify the economy and modernise the labour market have achieved limited results.

The lack of fiscal reform measures presents medium-term risks since there is typically a substantial time lag between reform implementation and results, particularly in sectors like education, said S&P Global.

Kuwait is also yet to pass a revised debt law authorising the government to borrow, raising questions about how future central government deficits will be financed. Although the sovereign wealth fund is substantial at about 500 per cent of GDP, the portion readily available for budgetary needs—General Reserve Fund—is much smaller, estimated at around 50 per cent of GDP, added S&P.

RELATED STORIES: S&P Global Kuwait OPEC General Reserve Fund COVID-19




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