Kuwait's A2/P1 ratings reflect the country's ability to develop and manage its abundant oil resources, says Moody's Investors Service in its annual credit report on Kuwait.
The Fund for Future Generations (FFG), designed to provide for the country when its oil runs out, is currently valued at approximately $65 billion, while the government has no foreign currency debt outstanding and has a government debt level comparable to its peers in the A2 rating category. At the same time, Moody's notes that more transparency regarding the FFG could exert positive pressure on the ratings.
Kuwait houses some of the world's largest oil fields, and it is encouraging foreign investment to help develop oil production capacity. "Future expansion of the oil sector rests heavily on Project Kuwait, the seven billion dollar plan that would develop fields in the north of the country," says Moody's AVP analyst and author of the new report, Bernard Musyck.
With oil accounting for over 50 percent of gross domestic product (GDP) and about 90 percent of total budgetary revenues, there is broad agreement regarding the importance of attracting investment from the international oil companies. "Opening the oil sector to this type of foreign investment would further develop oil production capacity in light of expected competition from Russia and Iraq," adds Musyck.
However, notes Moody's, despite general support for this plan, it has been stalled for over ten years for a variety of reasons, including prolonged discussions on how contracts with international oil companies should be approved by parliament, since the state owns and controls all oil resources in Kuwait by constitutional mandate.
However, the National Assembly is expected to ratify the Project Kuwait plan sooner rather than later because of the need to secure the participation of international oil companies before they choose to invest in Iraq instead, Moody's adds.
Iraq is a natural outlet for the private capital, which cannot find adequate investment outlets inside the country because of the atrophy of the private sector, says Moody's.
Kuwait's geographic proximity, coupled with its developed infrastructure of ports and roads, makes it a natural hub for the reconstruction of Iraq and a commercial gateway that could be exploited by the Kuwaiti private sector, including traditional merchant families.
Moreover, in the short run, Kuwait could possibly supply oil to Iraq while becoming an importer of Iraq's gas in the long run. Private sector development in Iraq was limited under Saddam Hussein, and his recent overthrow presents even greater investment opportunities, says the rating agency.
"The government is trying to encourage Kuwaiti citizens to enter the traditionally foreigner-dominated private sector by extending traditional public sector social allowances to Kuwaitis employed in the private sector," says Musyck. "Yet the labor law enacted with the framework of ‘Kuwaitisation’ distorts free market mechanisms which should govern a proper allocation of resources in the labor market," the analyst explains.
Critics argue that flat subsidies across the board to promote private sector employment are ineffective since the private sector lacks sufficient absorption capacity. "Training subsidies would appear to offer better chances of success in the long run," the analyst concludes. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
