Standard & Poor’s Ratings Services said today it raised its long-term sovereign credit rating on the State of Kuwait to ‘AA-‘ from ‘A+’. At the same time, the short-term ‘A-1+’ sovereign credit rating was also affirmed. The outlook is stable. In addition, Standard & Poor’s raised its transfer and convertibility assessment on Kuwait to ‘AA+’ from ‘AA’.
“The upgrade reflects the increase in the financial strength of the country and the government over the past few years,” said Standard & Poor’s credit analyst Luc Marchand. “The country’s net external asset position is forecast to reach 276% of current account receipts in 2007, and the government is expected to have a net asset position of 288% of GDP by the end of 2007. These levels are significantly higher than those of ‘AA’ rated peers, and partially offset the still-high regional geopolitical risk.”
The ratings are also supported by a track record of prudent macroeconomic policies. Based on a very conservative oil price assumption, the central government budget should again record a substantial surplus of about 29% of GDP in fiscal 2007/2008. Moreover, the government debt burden is light, and paper is issued mainly for monetary policy purposes.
The ratings on Kuwait are constrained by an economic structure dominated by the government through its ownership of the oil sector. Despite the government’s aim of enhancing economic efficiency and ensuring social equality, its role in the economy has resulted in a large public administration, a limited private sector, and an overall dependence of economic activity on oil receipts and government spending.
Geopolitical risks remain high and act as a constraint on the ratings on the sovereign. These risks are mitigated, however, by good international alliances, relative social stability, and substantial government assets.
“The considerable strength of Kuwait’s public finances are counterbalanced by the high geopolitical risks and the lack of diversification in the economy outside oil and the public sector,” said Mr. Marchand. “Although the geopolitical risk remains high, we expect the strength of Kuwait’s finances to help the country navigate potential periods of geopolitical turbulence.”
Progress on diversifying the economic structure is possible in the medium term, but future upward revisions to the ratings are more likely to depend on a positive reassessment of the political and geopolitical risks affecting the country.
