Fitch, the global credit rating agency said downgrading of Kuwait’s long-term rating from AA to AA- is the result of the ongoing impasse in political decision-making process and structural challenges related to the massive dependence on oil, the generous welfare state and a large government sector, reports Al- Rai daily.

The agency added there is crystal-clear absence of any serious financial adjustment to the recent oil price shocks, while the prospects for reforms are still weak, despite some positive political developments within the framework of the national dialogue, pointing out in her report that political divisions still exist, despite the national dialogue, likely to hinder Any broader reforms of Kuwait’s fiscal stalemate.

As for the public debt law, Fitch feels the law will be agreed upon this year, although some uncertainty lingers on and even without a public debt law, sources say, the government will still be able to meet its financing obligations.

However, difficulties in passing the law and institutional stalemate have forced the government to rely on temporary measures, considering this reliance unusual for Kuwait’s rating level. Fitch stated that Kuwait’s financial and external balance sheets are still among the strongest sovereign governments rated by the agency, despite the sharp fluctuations in oil prices since 2014. According to its estimates, the position of Kuwait’s net sovereign foreign assets is more than 500 percent of GDP, which is the highest among all sovereigns rated by “Fitch” and 10 times the average of governments with “AA” rating. Fitch said total government debt/GDP is low and expects it to fall to 10% of GDP in the fiscal year ending March 2022 (Fiscal Year 2021). However, the agency expects the budget deficit to widen in the coming years and government debt to rise to 50 percent of GDP over the medium term.

This assumes that annual Brent crude prices will be $70 per barrel in 2022, $60 in 2023 and $53 in the medium term. On the other hand, the agency said that structural indicators are relatively weak, adding that dependence on oil and relatively weak governance indicators affect Kuwait’s rating. Kuwait remains highly dependent on oil revenues, while budget outcomes are highly sensitive to oil prices. Fitch pointed out that a change in the oil price of $10/barrel affects the budget by about 5.5 percent of GDP, all factors being equal.

On the other hand, Fitch expected the general government deficit to shrink sharply to 1.6 percent of GDP in fiscal year 2021 from 20.6% of GDP in fiscal year 2020. This includes the estimated investment interest income of the General Investment Authority, which has not been officially disclosed. The agency expects revenue to grow by more than 50 percent (after declining 32 percent in fiscal year 2020), to reach KD 21.8 billion, driven by a 75 percent increase in oil prices and a slight increase in production. In the first nine months of the fiscal year, April-December, the budget deficit amounted to 0.7 billion dinars, a decrease of 87 percent year-on-year due to higher oil prices and lower budget spending. Spending is likely to pick up in the final months of the fiscal year, although Fitch expects it to fall short of its 23 billion dinars budget

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