Rating Agency Capital Intelligence has raised Kuwait's long-term foreign currency rating to A+ from A, and affirmed its short-term foreign currency rating at A1. The rating agency also assigned a long-term local currency rating of A+ and a short-term local currency rating of A1 to the sovereign. The outlook is stable, reported a press release.
The upgrade reflects CI's expectation that the budget and external current account will remain in surplus in the foreseeable future enabling the government to continue accumulating assets for future generations and bolstering the country's net external creditor position. The upgrade also takes account of the reduction in geopolitical risk following the change of regime in neighboring Iraq.
Kuwait's sovereign ratings are supported by a track record of prudent fiscal management and strong external finances. The budget, inclusive of investment income, has recorded large surpluses averaging around 24 percent of GDP in each of the past five fiscal years on the back of persistently strong oil prices and good expenditure control.
This has enabled the state to continue building external assets both for future generations and as a financing buffer against future oil or other economic shocks. Government debt is low, at 26 percent of gross domestic product (GDP) at end-2003, and treasury instruments are currently being issued for monetary policy purposes rather than government financing needs.
Against this, the government has financial assets in the form of banking system deposits and the investments of its two oil funds conservatively estimated to amount to around 184 percent of GDP. This estimate is subject to a considerable margin of error, however, as public disclosure of the funds' assets is prohibited by law.
Favorable terms of trade resulting from high oil prices in recent years contributed to very large current account surpluses averaging 23 percent of GDP in 2000-03, and consequently the further accumulation of net foreign assets, particularly in the public and financial sectors.
This has made Kuwait a very large net external creditor in the region of 258 percent of GDP. International liquidity is ample: at end-2003 the official reserves of the central bank were sufficient to cover 5.5 months of projected imports for 2004 and around 155 percent of the external debt estimated to be falling due this year.
Sovereign creditworthiness is constrained by various structural deficiencies, notably an overdependence on oil which accounts directly for around 48 percent of nominal GDP, 76 percent of budget revenues, and 92 percent of exports. This means that national output growth, government cashflow, and foreign exchange earnings are all vulnerable to volatile oil prices. The budget is structurally weak due to a limited non-oil revenue base and spending rigidities, with the bulk of total expenditure geared to the payment of wages, social security, interest and subsidies.
CI also notes that economic structure is not sufficiently flexible to cope with demographic pressures that could in the medium to longer term contribute to serious labor market strains and the erosion of real per capita incomes.
The capacity for the capital-intensive energy sector or public institutions to provide jobs for a fast growing indigenous population is approaching its limits. Stronger non-oil GDP growth and greater participation of the private sector in economic activity is needed but the authorities have so far been slow to implement the structural reforms that would facilitate diversification. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
