Kuwait: Risk Assessment


Country Risk Rating

A3 Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.

Business Climate Rating

A4 The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.

Strengths

  • Large oil reserves (9% of the global total) 
  • Very solid financial situation thanks to the accumulation of considerable public and external surpluses, managed by the Kuwait Investment Authority (KIA) sovereign fund
  • Welfare state financed by the oil windfall 

Weaknesses

  • Political obstacles to structural reforms
  • Business and competitive climate can be improved (country ranked 104th out of 189 by the World Bank)
  • Located in a region with acute geopolitical tensions, linked in particular to the proximity of Iraq and Iran

Current Trends

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Listless growth in 2015 and slight recovery expected in 2016

Kuwait has recorded low growth rates since 2013, and 2015 is not an exception. Growth has been sluggish due to the negative performances of the oil sector. The downward pressures on the price of Brent in 2015 have reinforced the negative outlook for the Kuwaiti hydrocarbon sector while the government intends to invest massively to make better use of its oil resources. 2016 could therefore be marked by a slight recovery in the hydrocarbon sector in spite of a difficult international economic environment. Although non-oil growth has been robust, it has been unable to offset the fall in the oil GDP. The upturn expected in 2016 would be attributable to significant public investments provided for in the development plan (2015-2019). Historically, consumption and investment contribute less than exports, but the fall in oil export revenues could reverse the trend. Public investments affecting many economic sectors are likely to counterbalance the slowdown in private investment. The real estate market will probably be flat following the slowdown in demand for residential housing, but the sector is expected to remain underpinned by the rapid expansion in commercial real estate. Household consumption should grow faster pace, but at a lower rate than in 2015. The fall in commodity prices has had only limited impact on inflation and a general level of price has, conversely, risen in 2015 due to the increase in food and energy prices. Inflation should, however, stabilize in 2016 owing to reduced pressure on real estate prices and a reduction in manufacturing producer costs.

Contraction in the budget surplus and the current-account surplus

Because of the low oil price required to balance public accounts, Kuwaiti public finances are the least vulnerable to a falls in hydrocarbon prices. Revenues have nevertheless fallen significantly (45%), forcing the authorities to carry out austerity measures to curb current spending. Government transfer payments to para-governmental entities are likely to be reduced and the same holds for energy subsides to the private sector. The authorities will nevertheless continue to support activity. Investment spending, which increased by nearly 35% between August 2014 and August 2015, is expected to grow in 2016 after the implementation of the strategic development program. Investments in infrastructures will include the launch of a new airport terminal and an extension of the road system with a budget estimated at one billion dollars. The transfers of 10% of the revenues to the fund for future generations is planned to start again, leading to a borrowing requirement that the authorities plans to cover by external borrowing.

The large external surpluses have given way to a current account balance of less than 10% in 2015. In 2016, the current account balance is likely to stay in positive territory, but it will contract significantly. The structurally positive trade balance should decrease in proportion to the fall in exports, with imports increasing to a lesser extent. The deficit in the services balance will decrease slightly, offset by the large income balance surpluses that should benefit from the increase in the return on investment. Lastly, transfers from expatriates will probably remain significant despite the economic slowdown.

Sustainability of the regime despite the recurring tensions between the parliament and the executive.

The Kuwaiti parliament was elected by universal suffrage in July 2013 and remains dominated by the Sunnite majority in power. The relations between the parliament and the Al Sabah royal family, in charge of the executive, are marked by periods of recurring tensions. An opposition party not represented in the parliament which includes Shiite as well as Sunnite groups has called for a constitutional reform leading to a strengthening of the parliamentary regime. Moreover, the problems linked to the succession of the emir between the different branches of the reigning family make the country’s political future unclear.

Kuwait is not spared by the security tensions that are undermining the region. In June 2015, an attack for which Daesh claimed responsibility targeted a Shiite mosque and claimed 26 lives. Furthermore, the historically strained relations with the Iranian neighbor should improve after the signing of the 14 July agreement on Iranian nuclear power.

Source:

Coface (09/2016)
VERY LOW RISK............ACCEPTABLE RISK............ VERY HIGH RISK


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