Kuwait Sovereign Ratings Affirmed; Outlook Remains Stable

(MENAFN- Capital Intelligence Ltd) Rating Action

Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and LT Local Currency Rating (LT LCR) of Kuwait at ‘A+’. At the same time, CI Ratings has affirmed the sovereign’s Short-Term (ST) FCR and ST LCR at ‘A1’. The Outlook on the ratings remains Stable.

Rating Rationale

The ratings are supported by very strong external finances, including very high current account surpluses, the substantial financial assets of the Future Generations Fund (FGF), and strong external debt capacity. The ratings also take into account the country’s large hydrocarbon reserves, very high GDP per capita, very low level of central government debt, and resilient banking sector.

The ratings continue to be constrained by the country’s heavy reliance on hydrocarbons, high geopolitical risk factors, and weak budget structure including limited revenue diversification and very high expenditure rigidity. The ratings are also constrained by slow reform pace and moderately weak institutional strength, including limited accountability and checks on the public sector, as well as limited policy transparency.

Budget financing flexibility has improved since our last review, following the passage of a new Public Debt and Liquidity Law in March 2025. The law re-establishes the government’s ability to issue debt and raises the sovereign borrowing ceiling from KWD10bn to KWD30bn (approximately USD97bn). Although no new eurobond issuance has occurred as of July 2025, credible reports suggest the government is preparing for a sovereign bond offering in the range of USD6bn to USD8bn. This would mark Kuwait’s return to international capital markets following its debut USD8bn issuance in 2017, and it is expected to widen the financing venues for the central government’s budget deficit.

Although CI views the passage of the debt law as a positive development, it remains insufficient – in isolation – to address the fundamental structural weaknesses in Kuwait’s fiscal framework. Moreover, the debt law is not anchored in a medium-term fiscal framework or debt management strategy. In the absence of effective expenditure controls or a commitment to building non-oil revenue streams, the risk remains that debt accumulation will outpace economic and revenue growth over time and may delay additional fiscal adjustment. Furthermore, continued reliance on oil market volatility to fund growing spending pressures continues to expose the public finances to cyclical downturns.

While the pace of reform implementation has seen modest acceleration under the Third National Development Plan (2024–2029) and Kuwait Vision 2035, progress remains insufficient to diversify the economy or meaningfully alter the structure of the budget. Kuwait lags behind most regional peers in introducing key fiscal reforms, including VAT, corporate tax enhancement and greater private sector participation. Moreover, previous reform announcements have frequently lacked follow-through, underscoring doubts around implementation capacity.

The budget structure remains weak (for the rating level), reflecting high dependence on hydrocarbon revenues, as well as a large public wage bill and a generous social welfare system. On the revenue side, hydrocarbon revenues accounted for 87.7% of total revenues in H1 FY25. Moreover, expenditure rigidity is highly pronounced, with salaries and subsidies accounting for almost 81% of total expenditure in H1 FY25, and the government employing nearly 80% of nationals.

Institutional strength remains moderately weak, reflecting declining accountability and checks following the dissolution of the Kuwaiti parliament and suspension of several articles in the constitution in May 2024. Moreover, limited policy transparency and the absence of a medium-term fiscal framework and proper data disclosure on the assets under the management of the Kuwait Investment Authority (KIA) continue to weigh on the country’s institutional strength. According to the World Bank’s 2023 Worldwide Governance Indicators, Kuwait fared moderate in aspects such as government effectiveness, regulatory quality and rule of law, while it fared low in voice and accountability.

Fiscal strength is deemed moderate. The central government budget is expected to have posted a deficit of 8.1% of GDP in FY25 – which ended in March 2025 – compared to a deficit of 3.1% in FY24. Despite the weak central government budget performance, gross financing needs remain moderate due to the very low level of debt (3% of GDP in FY25), and financing risks are mitigated by the assets of the budget stabilisation fund – the General Reserve Fund (GRF) – as well as the passage of the debt law which allows the government to borrow from capital markets. CI notes that the profits of state-owned enterprises (estimated by the IMF to be around 11.2% of GDP in FY25) are transferred to the GRF and are accessible by the government following the endorsement of the government’s budget.

The strength of the external finances is underpinned by continual oil-driven current account surpluses and reflected in the country’s large net external creditor position. Although the actual level of assets at the FGF, which is managed by the KIA, is uncertain as public disclosure is prohibited by law, the latest estimates exceed USD969bn (equivalent to around 5.6 times the country’s GDP in 2024), of which 50% is invested in the US. Official reserves, which are additional to the foreign assets held by the KIA, stood at USD46.2bn in May 2025, compared to USD44.8bn in December 2024, with the latter providing very high coverage of imports (8.4 months), M2 money supply (33.4%) and short-term external debt on a remaining maturity basis (384.5%).

The current account surplus remained very high at 29.8% of GDP in 2024, but was down slightly from 31.4% in 2023 owing to the impact of prolonged OPEC+ cuts on hydrocarbon production (which only recently started to be phased out). Moving forward, CI expects the current account position to remain in a surplus, averaging 20.0% of GDP in 2025-27, assuming an average oil price of USD61.7/barrel. Gross external debt is expected to have remained low at 51.6% of current account receipts in 2024.

Kuwait’s economy is gradually recovering in 2025, with real GDP projected to grow by 2.0%, compared to a contraction of 2.7% in 2024. This is attributable to the partial easing of OPEC+ production cuts and a modest pickup in non-oil activity. Growth is expected to strengthen further to an average of 2.3% in 2026-27, supported by higher oil output and increased public investment following the passage of the debt law. Early 2025 data show the economy returning to growth, but performance remains at or slightly below potential, constrained by structural rigidities and limited non-oil diversification. The short- to medium-term growth outlook remains subject to uncertainties stemming from high geopolitical risk factors and lower-than-projected demand for hydrocarbons in China and India. Notwithstanding the above, GDP per capita is very high at USD32,290 in 2024, and is considered a supporting factor for the ratings.

Banking sector strength remains moderate with good asset quality and profitability, as well as comfortable liquidity and sound capitalisation despite concentrations in both funding and lending. The average capital adequacy ratio stood at 18.7% as of March 2025, while the NPLs to gross loans ratio remained unchanged at a low 1.6% during the same period, with provision coverage of 253.5% of NPLs. That said, credit risk remains a concern due to banks’ exposure to the real estate sector, which accounted for 21% of total loans for the resident private sector in May 2025. There are also significant concentration issues in terms of customer deposit funding – especially with regards to broad public sector deposits, including government deposits, which stood at around 21.9% of total deposits (26.1% of GDP) in May 2025.

In common with other GCC countries, Kuwait remains exposed to high geopolitical risks stemming from the continued tension between the US and Iran in both the Red Sea and the Arabian Gulf. A renewed military escalation between Israel and Iran could lead to a disruption of capital inflows, as well as oil and gas exports.
 
Rating Outlook

The Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months. The outlook balances the government’s low debt and strong external balances against risks stemming from the slow pace of reform implementation and the high dependence on hydrocarbons.

Rating Dynamics: Upside Scenario

The Outlook could be revised to Positive over the next 12 months if the policymaking environment improves significantly, allowing the government to embark on serious reforms that tackle fiscal and economic vulnerabilities, as well as reduce dependence on hydrocarbons.

Rating Dynamics: Downside Scenario

The Outlook could be revised to Negative, or the ratings lowered, if the public and external finances deteriorate significantly (for example, due to a prolonged decline in hydrocarbon prices) and/or in the event of a significant increase in geopolitical risk factors, leading to a prolonged disruption of oil production and trade in the Arabian Gulf.

Contact

Primary Analyst: Dina Ennab, Sovereign Analyst, E-mail: ...
Committee Chairperson: Morris Helal, Senior Credit Analyst

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