Why unrest in Kuwait could affect its rating

Why unrest in Kuwait could affect its rating

Prolonged political stalemate could also undermine Kuwait's rating through its impact on the economy. The public sector is a key engine of the Kuwaiti economy (80% of Kuwaiti nationals work in the public sector) and the development of the private sector is limited.

October 30, 2012 9:33 by Reuters

Recent popular protests suggest a radicalisation of the political scene in Kuwait, Fitch Ratings says. Kuwait’s sovereign external balance sheet is the strongest of all Fitch-rated countries and means the country’s ‘AA’ sovereign rating can endure further political instability. However, a serious escalation of public unrest could threaten the rating. Much will depend on how the authorities respond, and whether large-scale violence is avoided.

An Emiri decree to change the electoral law in a way that is expected to weaken anti-government representation in parliament at the upcoming December elections has triggered rare large-scale street protests and unprecedented public
criticism of the ruling family. The authorities’ response, including the use of tear gas and the number of arrests, has surprised observers.

Measures to ban large public demonstrations and strengthen the powers of police helped avert protests planned over the past few days. Nonetheless, longstanding political grievances are unlikely to be resolved by the December elections,
which opposition MPs and supporters are threatening to boycott.Prolonged political stalemate could also undermine Kuwait’s rating through its impact on the economy. The public sector is a key engine of the Kuwaiti economy (80% of Kuwaiti nationals work in the public sector) and the development of the private sector is limited. Execution of government projects and the 2010-2014 Development Plan has been hindered severely due to difficulties in reaching agreement at the political level.

Conversely, if Kuwait manages to resolve the current stalemate it would confirm one of its ratings strengths compared with its regional peers. We believe Kuwait’s relatively open political institutions, where the executive is appointed by the unelected Emir and held to account by an elected parliament, reduce the risk of major civil unrest, and this is factored into our rating.

World Bank indicators for Voice and Accountability are better than other Gulf Cooperation Council countries. The pillar of Kuwait’s rating is its strong sovereign and external balance sheet; sovereign net foreign assets are estimated by Fitch at USD323bn at the end of 2011 (equivalent to 191% of GDP). Kuwait’s strong external position and public finances are a result of double-digit budget surpluses recorded everyyear since 1999 stemming from receipts from the country’s substantial oil reserves (6.1% of total world proven oil reserves). Fitch projects oil production levels and prices will remain at a level that ensures continuing high budget surpluses (27% of GDP expected in FY12/13 and 22% in FY13/14, after 31% in FY11/12). As a result, sovereign net foreign assets will continue to grow over the rating horizon, enhancing the economy’s capacity to deal with economic shocks.

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.

Applicable Criteria and(New York Ratings Team)