Moody’s assigns negative ratings outlook to Kuwait

KUWAIT RATINGS: Moody's maintains Aa2 sovereign ratings, but notes political uncertainty. (Getty Images)

Moody's Investors Service announced on Tuesday it has confirmed Kuwait's Aa2 sovereign ratings but has applied a negative ratings outlook.

The rating action concludes a review that was initiated on March 19.

"Today's (Tuesday’s) rating action balances two considerations. On the one hand, Moody's recognises that Kuwait's fiscal and economic strengths remain superior to most rating peers despite some adverse fallout from the global crisis.

''Yet on the other, Moody's is concerned by the conflictual relationship between the government and parliament which, in our opinion, is causing a gradual erosion of institutional strength," said Tristan Cooper, Head Analyst for Middle East Sovereigns at Moody's in Dubai.

The erratic and tumultuous policy environment in Kuwait has 'somewhat weighed' on Moody's opinion of Kuwait's sovereign creditworthiness. The agency noted the recent election of a new parliament and the formation of a new government. However, it remains to be seen whether these developments will lead to a sustained improvement in the policy environment.

Moody's stressed however the many positive elements that support Kuwait's very high investment-grade ratings. These include an exceptionally strong government balance sheet and net external asset position, wide fiscal and current account surpluses, a high level of GDP per capita, and extensive oil reserves.

Such strengths should enable Kuwait's economy and public finances to absorb shocks, including the further possible materialisation of contingent liabilities stemming from the financial sector, without affecting the government's capacity to repay its debt obligations.

The agency cautioned, however, that as with some other countries in the region or those having sovereign wealth funds, transparency regarding the government's financial assets is poor.

"Our negative sovereign ratings outlook reflects our concerns regarding the effectiveness and efficiency of the policy framework in Kuwait and indicates that there is still some downward pressure on Kuwait's sovereign ratings.

''Kuwait's ratings would be lowered should the discord between the government and parliament translate into a more significant degree of political inefficiency that weakened the ability of the authorities to address potential economic and financial challenges.

''Robust crisis management capabilities are ultimately protective to creditors' long-term interests. However, we would also be ready to move the outlook back to stable if the relationship between the government and the parliament were to improve, thereby easing the formulation and implementation of policy and enabling Kuwait to move forward in its efforts to develop and diversify its economy," said Cooper.

The time horizon of rating outlooks is generally 12 to 18 months.

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