Press Release: Fitch: Kuwait Fiscal Strength, Politics Mean Slower Adjustment
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Fitch Ratings-Hong Kong/London-10 August 2016: Kuwait’s new budget indicates smaller fiscal consolidation than in many highly rated regional peers, Fitch Ratings says. This reflects the government’s exceptionally strong fiscal position, but also the difficulty of pursuing structural reforms, and the government’s efforts to catch up with its domestic infrastructure investment plan.
The budget for fiscal year ending March 2017 (FY17), approved by parliament on 3 August, implies a budget deficit excluding oil income and financial investment flows of 69% of non-oil GDP, compared with 87% of non-oil GDP in FY15. This adjustment of around 18% of non-oil GDP over two years, half of which has been automatic as falling oil prices have lowered subsidy expenditure, is smaller than in Abu Dhabi (AA/Stable, 28%) and Saudi Arabia (AA-/Negative, 24%), but larger than Qatar (AA/Stable, 4%).
Kuwait’s (AA/Stable) ample fiscal space reduces pressure to make rapid fiscal adjustments. Sovereign net foreign assets are the largest of any Fitch-rated sovereign and debt/GDP is among the lowest. The Reserve Fund for Future Generations (RFFG) has estimated assets of more than 300% of GDP. Fitch forecasts the value of the General Reserve Fund (GRF) to fall to 98% of GDP in FY17 from 103% in FY16. These estimates are based on public, non-official sources.
The RFFG cannot be used for deficit financing, so Kuwait will issue debt and draw on the GRF. Fitch expects that budgeted issuance of KWD5bn (USD16.6bn) will raise Kuwait’s debt ratio from 9% of GDP at end-2015 to 24% of GDP at end-2016, still well below the ‘AA’ category median of around 39%.
– The budgeted headline deficit of KWD9.7bn understates Kuwait’s structural fiscal balance, as it treats KWD1bn worth of transfers to the RFFG as an expense, and excludes an estimated KWD7bn of investment income (mostly in the RFFG). Adding these two items, at a Brent oil price assumption of USD42/bbl, Fitch forecasts a small surplus of KWD0.7bn, 1.9% of GDP in FY17, down from 3.1% for last year.
Subsidy reform in Kuwait has lagged behind other highly rated GCC countries, with reforms like the fuel price rises approved on 1 August by Kuwait’s cabinet already enacted in the UAE, Saudi Arabia, and Qatar. This highlights the difficulties the government faces in building political consensus on reform. Attempts to raise diesel and kerosene prices in January 2015 were partly rolled back due to parliamentary opposition. The utility price rises approved in April 2016 will only come into effect in September 2017 and will only apply to non-Kuwaitis (70% of the population).
Overall expenditure is budgeted to rise by 3.5% in FY17 compared with the preliminary FY16 outturns, as low budgeted growth in the wage bill and transfers and subsidies offsets budgeted declines in goods and services and capital spending. Fitch forecasts a 6.8% increase, based on stronger-than-budgeted wage growth (due to population and price growth), and better execution of capital spending than last year. Wage restraint is likely to prove challenging, as demonstrated in April 2016 when oil refinery workers went on strike against public-sector wage reform..
– Fitch expects capital spending to be close to budgeted amounts in FY17, after 89% execution in FY16, 81% in FY15 and 68% in FY14. The rise reflects a more stable political environment that should allow the government to pursue its KWD34bn (90% of GDP) 2015-2020 development plan, much of which the government intends to undertake through government companies and public-private partnerships.
2016′)”>https://www.fitchratings.com/site/re/884244″>2016 Mid-Year Sovereign Review and Outlook
Kuwait’)”>https://www.fitchratings.com/site/re/874875″>Kuwait Full Rating Report
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Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick[a]fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.