Arab News, Sat, Jun 08, 2024 | Dhu al-Hijjah 2, 1445
CBK: Standard & Poor’s confirms Kuwait’s sovereign rating at A+ with stable outlook
Saudi Arabia:
The Central Bank of Kuwait (CBK) said Friday that the international rating
agency of Standard & Poor’s confirmed the sovereign rating of Kuwait at A+, with
a stable future outlook due to a huge stock of government financial assets
support estimated at about 418 percent of the gross domestic product in 2024.
In a statement, the Central Bank noted that the
Standard & Poor’s report indicated that Kuwait’s structural and financial
reforms are still lagging behind its peers, and its economy is considered among
the most dependent on the oil sector, among GCC countries, which It exposes its
economy to fluctuations of the oil market.
The statement added that Standard & Poor’s
expected that the real gross domestic product would grow by 2.4 percent on
average during the years 2025-2027, compared to a contraction of 2.3 percent in
2024, assuming a slight easing in the restrictions of the OPEC+ agreement on oil
production.
CBK also pointed out that the rating agency also
expected to accelerate the implementation of large government investment
projects and focus on partnerships between the public and private sectors and
high-impact projects led by the (New Kuwait 2035) vision. Regarding the rating
prospects, the statement noted that the stable future outlook reflects the
agency’s assumption that the large financial and external balances in Kuwait
will continue to be strong during the forecast period, supported by a huge stock
of government financial assets estimated at about 418 percent of the gross
domestic product in 2024, which is among the largest sovereign funds of
countries.
CBK noted that the agency expected these assets to
reach 447 percent of the gross domestic product during the years 2024-2027,
pointing out that these huge government assets are expected to mitigate the
economic risks associated with the heavy dependence on the oil sector and
potential fluctuations in oil prices. It stated that the agency listed the most
important factors that could lead to a downgrade of the country’s sovereign
credit rating in the event of a significant increase in public financial
imbalances driven by a decline in oil prices or the absence of financial
reforms.
The rating could also be downgraded if the
government remains without comprehensive financing arrangements for the deficits
in the general budget, the report noted. CBK also said that the agency stated
that the country’s credit rating could be improved if the government succeeds in
implementing a comprehensive structural reform package, such as diversifying the
economy away from the oil sector and increasing its production capacity, which
leads to stronger prospects for growth.
Regarding the reasons for the classification, the
agency noted that Kuwaiti economy is still largely dependent on the oil sector,
which represents approximately 90 percent of exports and government revenues and
about 50 percent of the gross domestic product, as this sector contributed
significantly to achieving surpluses. The agency pointed out in its report that
high government spending, including the very large wage and salary bill, ensures
that large surpluses in the financial accounts will not be repeated, as Kuwait
has suffered from a deficit throughout the past 10 years, with the exception of
two fiscal years (2013-2014) and (2014-2015), expecting such deficits will
continue for the fiscal years (2023/2024 - 2027/2028).Regarding financial
reforms, the agency expected that authorities in Kuwait would move to impose new
selective taxes on tobacco and sugary drinks and increase fees on a group of
government services, noting that it is unlikely to impose a value-added tax
(VAT) with the possibility of passing the public debt law in the fiscal year
(2025/2026).Other financial reforms aimed at reducing the wage bill remain
important but are under discussion, and the government seeks to increase the
employment of citizens in the private sector.
As for developments in the general budget of the
country, the agency estimated the budget deficit in the fiscal year (2023/2024)
at about 4.7 percent of the GDP. It also estimated that the deficit in the
fiscal year (2024/2025) would shrink to 3.1 percent of the GDP. Regarding
monetary policy and exchange rate policy, Standard & Poor’s expected that the
Kuwaiti dinar’s exchange rate would continue to be linked to an undeclared
weighted basket of currencies. Consumer price inflation (CPI) remained around
3.6 percent in 2023, down from 4 percent in 2022, the agency said, projecting
that the CPI will moderate throughout the forecast period averaging 2.3 percent
in 2024-2027. It is lower than in many developed and emerging markets, it
estimated. It did not envisage significant contingent liabilities for the
government from the banking sector in Kuwait, which has demonstrated strong
resilience and financial soundness over the past few years. It forecasted
subdued credit growth in 2024 and 2025, rising in 2026-2027.The agency expected
that banks’ high provision buffers will allow them to limit the increase in f
nonperforming loans (NPLs) ratios by writing off NPLs, which are already at a
very low level, and stood at 1.4 percent in December 2023.