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Despite the prospects of a delayed oil price recovery, Kuwait’s very high levels of economic and fiscal strength will continue to support the country’s credit profile and its Aa2 rating with a stable outlook in 2015 and 2016, according to Moody’s Investors Service.
The rating agency expects that oil prices will start a gradual recovery in 2017. It projects that the price of Brent crude will average $55 per barrel this year and $57 a barrel the following year.
Given the oil sector’s importance to the Kuwaiti economy, the agency expects a sizable contraction in nominal GDP in 2015 and only a small recovery in 2016. On the other hand, while real GDP will only grow at a projected average rate of 1.5% in 2015-16, this will mark a recovery from a 1.6% contraction in 2014.
"Kuwait’s government revenues are sensitive to oil price movements, because oil revenues account for about 80% of total revenues. But we still expect the government to register small fiscal surpluses of around 1.8% of GDP this fiscal year and next given Kuwait’s low fiscal breakeven oil price," said Steffen Dyck, a Moody’s Senior Analyst.
"Kuwait’s sizeable assets will also provide a buffer allowing its public finances to withstand the impact of lower oil prices for longer," said Dyck.
"We forecast that the Kuwaiti government’s nominal debt level will remain broadly unchanged throughout 2015-16, because our oil price assumptions point to continued fiscal surpluses." According to Moody’s, Kuwait’s debt level was 6.5% of GDP at end-2014. However, owing to the projected contraction in nominal GDP, the government debt-to-GDP ratio will rise to a still very low level of around 8.5% in 2015-16.
The government is also exploring revenue-enhancing measures such as corporate and income taxes, although based on the government’s announced plans Moody’s does not expect large reforms over the coming 12 months.
Instead, it expects the focus to remain on increasing the overall revenue collection efficiency and re-pricing certain government service fees. Moody’s views unilateral introduction of value-added tax without GCC-wide coordination as highly unlikely.
Moody’s notes Kuwait’s vulnerability to regional geopolitical developments, which exposes the country to moderate overall event risk.
