International ratings agency Standard & Poor's (S&P's) raised its foreign currency issuer credit ratings on the state of Kuwait in April 2002. At the same time, it affirmed all its local currency ratings on the state. The upgrade reflects Kuwait's track record of very strong public finances across the business cycle, as well as steady and broad-based improvements in its policy framework, with good prospects for further progress in the medium term.
Geopolitical event risk, which remains a key constraining factor on the ratings, is offset by Kuwait's extremely strong net asset position, which should allow it to weather conceivable stress scenarios related to the security situation in the region.
The ratings on Kuwait are supported by its continued fiscal prudence. The budget for fiscal 2002/2003, commencing on April 1, continues the recent practice of making conservative oil revenue projections, on the basis of an average oil price of $15 per barrel. By contrast, most independent oil analysts forecast an average price in excess of $20 per barrel this year. The Kuwaiti government has thereby almost eliminated the downside risk to its oil revenues in 2002/2003, and is almost certain to achieve oil revenues well in excess of the budgeted level.
Meanwhile, the budgeted increase in capital expenditures is unlikely to be executed, due to lengthy bureaucratic procedures. Current expenditures are budgeted to increase somewhat; using an international presentation of the budget and assuming an average oil price of $22 per barrel, however, S&P's expects the government to achieve a surplus of about 15 percent of Gross Domestic Product (GDP) in 2002/2003, increasing its net asset position to about 2.5 times GDP.
The ratings on Kuwait are also supported by stable domestic political environment and robust defense arrangements. The government's unequivocal support of the US-led "war on terrorism", with the backing of the National Assembly and the general public, has demonstrated the strength of Kuwait's domestic stability and its alliance with the US, thereby bolstering its security from external threats. Although the U.S. has threatened to attack Iraq, even if there were a wide-scale war to change the regime in Iraq, Kuwait has contingency plans. Its creditworthiness, which was severely tested in 1990-1991 during the Gulf War, would remain strong.
Despite the strength of its finances and the resistance that it is facing in the National Assembly, the government is determined to pursue its program of economic and administrative reforms. The government hopes to attract foreign investment to upgrade installations and increase capacity in the northern oil fields, the so-called Project Kuwait. The Assembly is expected to debate the constitutional aspects of this project in the near future and to approve a long-delayed privatization bill.
In light of past experience with this bill, which revealed administrative weaknesses in the preparation of draft legislation, the government has recently taken remedial measures that should accelerate the legislative process and enhance implementation. The government is also implementing some reforms to improve the effectiveness of administration and the quality of public services.
The outlook balances the considerable strength of Kuwait's public finances against its structural weaknesses and the geopolitical risks that it faces. Although the pace of structural reforms might pick up, future revisions to the ratings are more likely to depend on a reassessment of geopolitical risks. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
