S&P recently affirmed its AA long term foreign currency rating of Kuwait with a stable outlook noting ‘Kuwait’s large government and external net asset positions will continue to afford the authorities space to gradually consolidate government finances.’ Fitch also affirmed its rating at AA (stable) at the end of January pointing to ‘continuing fiscal and external strengths’ although they note ‘the slow pace of fiscal reform and economic diversification increases long-term risks to Kuwait's public finances.’ But using Fitch’s estimate of sovereign net foreign assets of 500% of GDP we think Kuwait has time on its side to make the necessary adjustments.
Clearly, the improved oil price environment is helpful especially as Kuwait’s budget projections have tended to work off conservative oil prices. Kuwait recently approved its budget for FY19 (March year-end) which forecasts a deficit of KWD6.5bn. Fitch note ‘the FY18 budget assumed an oil price of USD 45pb, but the price of the Kuwait export blend has already averaged USD 51.7pb in the fiscal year to date.’ Moreover, Kuwait’s FY19 budget assumes an oil price of USD 50pbl. Given these assumptions the actual result is likely to be better.
The Finance Minister, Nayef al-Hajraf, stated that the deficit for 2018/19 will be covered by withdrawal from the General Reserve Fund and bond issuance. Importantly, as S&P highlight ‘In Kuwait's case, the central government deficit informs the central government's financing requirements. At the general government level, we include all potential sources of revenue and savings including the investment income of the Kuwait Investment Authority (KIA) and the mandatory 10% transfers of total central government revenue to the KIA's Future Generations Fund (FGF).’ Thus, their estimates for FY’18 show Kuwait’s fiscal position as surplus of 8% of GDP while noting at the central government level the deficit is nearly 16% of GDP.
For us Kuwait 3.5% 2027, which trades at a yield of 3.7%, and offers 3.8 credit notches cushion, according to our models, looks attractive.