S&P Global Ratings cut the rating of the government of Kuwait by one notch this week due to the economic and fiscal effects of lower oil prices, but affirmed those of Qatar and Saudi Arabia citing their strong financial buffers.
Oil prices have dropped by more than 40% since March 6 when an OPEC output cut agreement collapsed triggering a market share war between Saudi Arabia and Russia. S&P has since halved its oil price assumption for 2020 from an average of $60 per barrel to $30.
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Lower prices are expected to hit Gulf oil producers hard just as they deal with an economic slowdown from the coronavirus outbreak.
“The oil price drop is happening alongside Kuwait’s slow reform momentum, which has generally lagged that of other countries in recent years,” the agency said in a statement, having lowered Kuwait’s rating to AA-(minus) from AA.
Kuwait has accumulated large financial wealth from its oil sales but 80% of its exports are destined for Asia, where demand has slowed because of the coronavirus outbreak.
This adds risks to its economic outlook, said S&P, which estimated the government could be looking at a deficit of more than 10% of GDP in 2020.
Kuwait must still pass a revised debt law, raising questions about how it will finance deficits.
Its sovereign wealth fund stands at about 500% of GDP, but the portion available for budgetary purposes is estimated at only around 50% of GDP, said the agency.
“Absent passage of the debt law, it remains unclear whether Kuwait could face a hard budget constraint or start drawing on assets in the Future Generations Fund, which happened only once before, during the Gulf War.”
The agency affirmed its ratings for Saudi Arabia and Qatar, rated A-(minus) and AA-(minus), respectively.
The low oil price environment would be “counterbalanced by Saudi Arabia’s strong government and external balance sheets”, while Qatar’s government and external balance sheets “remain strong and provide a buffer to withstand external shocks,” S&P said in separate statements.
Prolonged low oil prices, however, could pressure the rating of Saudi Arabia, the world’s largest oil exporter, which S&P said could post a deficit of up to 11.2% of GDP this year.
Riyadh had predicted a 6.4% deficit but recently said lower oil prices and the coronavirus outbreak could push it out to 9%.
Qatar was hit in 2017 when neighbouring countries, including Saudi Arabia, imposed a boycott imposed on it during a row over security issues. But it has used its vast financial reserves to boost economic growth.
The tiny but gas-rich country derives 80% of government revenues from the hydrocarbon sector, making it vulnerable to a sustained decline in oil price, to which gas contracts are linked.
“Our expectation of lower oil prices will weigh on the country’s economic outlook and we project average growth at about 1.5% over the forecast horizon through 2023,” said S&P.
It projected a deficit of 2% of GDP this year compared with a 6.6% surplus last year.
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