Standard & Poor’s Ratings Services said that the general government budget has shown a surplus of at least 10% of GDP for the past decade.
“We estimate that–including our estimate of the government’s income from vast investments–the Kuwaiti government will have a surplus of about 30% of GDP for the budget year ending March 31, 2015. Our base-case scenario assumes that oil prices, although softening, will remain high, averaging at least $96 per barrel per year in 2014-2017, and that oil output will increase to about 3.5 million barrels per day by 2017, from about 3.2 million in 2013. As a result, we project that the general government budget surplus will stay high at above 20% of GDP on average over the next four years (despite our expectation of the oil price moderating). We estimate the government’s investment income was 9% of GDP in 2013 and we assume it will remain at about this level, based on our estimate of the average return over the past five years,” S&P in a statement said.
Kuwait increased its annual contributions to its Future Generations Fund to 25% of total revenues in the fiscal year ending in 2013, from 10% in previous years (owing to high oil prices, which led to strong revenues). The General Reserve Fund invests the remaining surplus and both funds are managed by the Kuwait Investment Authority. The government’s large net asset position, which we estimate at over 2.7x GDP in 2014, is a significant ratings strength. However, in our opinion, disclosure on the size and structure of the government’s assets is very limited and therefore a rating weakness.
“We estimate real GDP growth to average 2.6% in 2014-2017, but GDP per capita growth to contract about 0.4% per year, partly because of high population
growth; we expect countries with similar wealth levels to Kuwait to grow by
0.3%-1.5%. Nevertheless, in our view, Kuwait’s high wealth–we estimate GDP
per capita at $58,000 in 2014–means that its weak economic growth performance
(on a per capita basis) is not an immediate ratings concern.
“The strength of oil exports resulted in average current account surpluses estimated at more than 30% of GDP in 2004-2013. Combined with the government’s policy of investing a large portion of its surplus abroad, this has led to a significant accumulation of external assets. Kuwait is likely to record a
substantial net external asset position of over 400% of current account receipts (CARs) in 2014. At the same time, we project that gross external financing needs will remain low, averaging around 55% of CARs plus usable reserves in the next four years.
“Kuwait’s exchange rate is pegged to an undisclosed basket of currencies, but
with a likely bias to the U.S. dollar, constraining its monetary flexibility.
In our opinion, monetary flexibility is limited although we acknowledge that
the exchange rate regime is consistent with Kuwait’s reliance on U.S.
dollar-based oil revenues. Kuwait’s financial system remains stable, in our
view, its banks operating within a strong regulatory environment with healthy
capital levels.