Credit Rating – “Fitch” Agency

Fitch Ratings Agency confirmed its previous sovereign rating of Kuwait at “AA” with a stable future outlook. It believes that Kuwait will achieve fiscal deficit by around KD 7.3 billion for the fiscal year 2020/2021, the equivalent of 20% of its GDP. That reflects its expectations for the sharp decline in oil prices, bringing the price of Brent crude to US$ 35 and US$ 45 per barrel during 2020 and 2021 respectively, due to the current epidemic coupled with Kuwait’s weakness to adopt a financial policy to counter the epidemic impact and limit the heavy reliance on oil.

The report is both good and correct especially for those who wish to deal with Kuwait specifically for lenders. It is also good for Kuwait, because its good classification reduces the financing cost for the state and the Kuwaiti private sector if they resort to borrowing from the global market. However, the report is not true if it is understood as a testimony of the soundness of the Kuwaiti economy. The report implicitly does not deny this. Indeed, it confirms that Kuwait’s financial position is so good that it covers the serious flaws in the state of its economy such as its semi-total reliance on oil, its governance weakness, its poor business environment and the control of a costly public sector over its capabilities. In economics language, this means that its economic sustainability is skeptical. However, according to the report, there is nothing wrong with creditors and commercial dealers to continue with their dealings as in the visible future, under any scenario, they can recover their dues because of the accrued savings during the years of oil wealth.

The report is incorrect if it is read from a Kuwaiti economic point of view, as it does not adopt the rules of public finance science in calculating the public finance surplus and deficit, as public budget from its point of view is in surplus if it merges oil revenues with financial reserve investment revenues in its two sections.

The report estimates the size of foreign sovereign assets at $529 billion, which includes net assets for future generations at $489 billion. “Fitch” expected a drop in the General Reserve Fund’s reserve for the sixth consecutive year due to the government’s resorting to the fund to finance the public budget deficit and to pay the due local debts. The report states that the first-quarter losses of the Kuwaiti sovereign fund during the first quarter of 2020 erased the profits achieved during 2019.

In summary, the report is of good quality to Kuwait’s current and potential creditors and is good for Kuwait and its public and private sectors if they need to borrow from the global market. But it is a report that maybe misunderstood in its financial part due to the impression it conveys about the soundness of the financial situation. The report does not concern itself with the soundness of the economic situation because it is not within its audience interests.