Fitch Ratings has affirmed Kuwait's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA,' according to a fresh report released by the internationally renowned agency.
The outlooks are stable; Kuwait's ceiling has been affirmed at 'AA+' and the short-term foreign currency IDR at 'F1+'.
Key rating drivers, Kuwait's IDRs, reflect the following key rating drivers: Kuwait is resilient to the decline in oil prices that has occurred so far in 2014.
Very high per capita oil exports have consistently generated large fiscal and current account surpluses and surpluses in excess of 20% of GDP are forecast each year to 2016, despite the prospect of lower oil prices.
Fitch estimates that the FY14 fiscal breakeven oil price is USD48/b and the 2014 external breakeven is USD40/b. These are among the lowest of all rated sovereigns. An exceptionally strong sovereign balance sheet is the key support for the ratings.
Fitch forecasts that sovereign net foreign assets will rise to 269% of GDP at end-2014, the strongest of all rated sovereigns, and that the net creditor position will rise to 54% of GDP. Both are expected to improve over the forecast period. Current account surpluses are substantial.
Kuwait posted the second largest current account surplus of any Fitch-rated sovereign in 2013, at 39.7% of GDP, the third consecutive year that the surplus exceeded 30% of GDP.
Fitch expects the surplus to decline in line with the agency's forecast of lower oil prices, but still forecasts a surplus of 25% of GDP in 2016. The surplus has not been below 20% of GDP since 2003. Fiscal surpluses are consistently in double digits.
The general government surplus was the largest of all Fitch-rated sovereigns at an estimated 34.9% of GDP in FY14 (ending March). The fiscal breakeven oil price is low, at USD48/b in FY14, but so is capital spending, which is around 10% of total spending, one-third of regional peers.
Despite rising spending and falling oil revenues, the surplus is forecast to only fall to 25% of GDP in 2016. There are tentative signs that the non-oil economy is gaining momentum, reflected in the award of several projects in recent months and private sector credit growth at around a five-year high.
Fitch expects non-oil growth of around 4% over 2014-16. Headline real GDP growth will be lower, based on Fitch's assumption that oil production will be cut in both years.
Structural indicators are generally weaker than rating peers. Human development, business and World Bank governance indicators are well below the 'AA' median, but GDP per capita is substantially above the median. The economic policy framework is a weakness, reflecting limited monetary autonomy and a weak fiscal framework.
The regulatory framework for the capital markets is being improved and that for the banking sector is being strengthened further. Kuwait's oil accounts for around 40% of GDP and the bulk of fiscal and external revenues. Oil reserves are large and cheap to extract and production capacity is being increased.
The stable outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. At forecast oil prices, Kuwait will continue to accumulate assets, further enhancing its capacity to deal with economic shocks.
The main factors that individually or collectively could lead to positive rating action are: Improvement in structural weaknesses such as reduction in oil dependence, strengthening in governance, the business environment and the economic policy framework.
The main factors that, individually or collectively, could lead to negative rating action are: Sustained low oil prices that erode fiscal and external buffers, regional and serious political events. Fitch forecasts Brent crude to average USD83/b in 2015 and USD90/b in 2016. Production cuts of 5% in 2015 and 1% in 2016, likely in line with some other large producers, are forecast in order to support the oil market. Kuwait could likely tolerate much lower prices over the forecast period without facing undue pressure on its rating.