Moody’s affirms Kuwait A1 rating; stable outlook
While the government aims to address institutional barriers, the extent of its effectiveness is highly uncertain at this stage. The stable outlook reflects balanced risks to the ratings. Progress in economic and financial diversification away from hydrocarbons that is not currently taken into account in Moody’s underlying assumptions may reduce Kuwait’s exposure to oil price fluctuations and carbon migration in the long term. The recent dissolution of Parliament and temporary suspension of relevant constitutional articles aimed at overcoming institutional constraints should accelerate reforms.
In contrast, increasing global momentum towards a carbon transition that significantly reduces oil demand and price is likely to impact Kuwait’s credit metrics and weaken the credit profile in the absence of financial and economic reforms. Moody’s base scenario assumes that there is no significant escalation of the geopolitical conflict in the Middle East into a large-scale multi-front conflict involving Iran, which could have significant negative impacts on sovereigns in the region depending on transmission channels, exposures and buffers. The maximum ceiling for local and foreign currency in Kuwait was raised to Aa1 from Aa2.
The three-notch gap between the local currency ceiling and the sovereign rating reflects the stability of the country’s balance of payments through periods of oil price volatility, in the face of the economy’s exposure to a major source of revenue and the difficult domestic political environment that restricts prospects for reform and diversification. The zero gap between the foreign currency ceiling and the local currency ceiling reflects very low conversion and convertibility risks, given the country’s very large net external creditor position, which includes ample foreign exchange reserves held by the central bank.
Justifications for evaluations
Kuwait’s sovereign balance sheet and financial reserves will remain very strong for the foreseeable future, which will strengthen the sovereign credit profile. However, the lack of progress on reforms, largely due to fundamental and persistent institutional constraints, exposes the government to oil market volatility and long-term carbon transition risks. Last week, the king took the unusual step of temporarily suspending Parliament for up to four years in an attempt to address institutional barriers to reform, but building a track record of credible and effective policies is likely to take time.
Moody’s expects
The financial assets of the Government of Kuwait are expected to remain very large over the coming years. Moody’s estimates that the country’s total public financing, which mainly consists of assets in the Future Generations Fund (FGF), exceeded 400% of GDP at the end of 2023 – among the highest sovereign rates across the rating. Since there is no mechanism to transfer funds or income from the Future Generation Fund to the government budget or the General Reserve Fund (the government’s treasury account), Moody’s expects the size of the Future Generation Fund to continue to grow in tandem with global asset prices.
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