Moody’s downgrades Kuwait’s credit rating to A1

Moody’s Investors Service has downgraded Kuwait’s long-term foreign and local currency issuer rating to A1 from Aa2, and changed the outlook to stable. This is the first time Kuwait was downgraded by Moody’s.

Moody’s Kuwait’s foreign currency bond ceiling has been lowered to Aa3, from Aa2 and the foreign currency deposit ceiling has been lowered to A1 from Aa2, whereas the short-term ceilings remain at Prime-1 (P-1). The local currency bond and deposit ceilings have been lowered to Aa3 from Aa2.

“The decision to downgrade the ratings reflects both the increase in government liquidity risks and a weaker assessment of Kuwait’s institutions and governance strength,” Moody’s said in a statement.

“While liquidity risks are particularly relevant in the next few months, over the medium term next one or two years, upside and downside risks are broadly balanced reflected in the stable outlook,” the rating agency said.

Kuwait has a vast stock of sovereign financial assets currently ringfenced from the general budget by law, securing predictable access to which would eliminate government liquidity risk. On the other hand, Moody's said the "fractious relationship" between parliament and the government was a long-standing constraint in its assessment of Kuwait's institutional strength.

The standoff over the government’s medium-term funding strategy and the absence of any significant fiscal consolidation measures point to more major deficiencies in Kuwait’s legislative and executive institutions and policy effectiveness than previously assessed.

Explaining the grounds for the rating downgrade, Moody’s said with a government debt law yet to be passed and General Reserve Fund (GRF) assets likely to be depleted before the end of the current fiscal year (ending in March 2021), government liquidity risks have increased.

On the upside, Moody’s estimates 359% of GDP as of the end of fiscal year 2019/20 due to Kuwait’s vast stock of sovereign assets held in the Future Generations Fund (FGF). The assets and the investment income generated by the FGF are currently ringfenced from the general budget by law, indicating the obstacles Kuwait faces to resolve its funding challenges are primarily political, rather than outside of the control of the sovereign.