Kuwait sovereign issuance: The fund manager’s view

Philipp Good

We think it is very likely that Kuwait will offer sovereign debt to international markets in the third quarter of 2018, once Ramadan and the summer vacations are over. And we are looking forward to it. Kuwait is probably one of the strongest, if not the strongest, sovereign credits in the Middle East, so as an issuer it has considerable pricing power. While to some extent, positive Emerging Market (EM) sentiment has faded as a result of rising US yields, the stronger names will still be able to successfully tap the market – and one of those is Kuwait.
The backdrop to this scenario is that Kuwait has delivered a new budget and parliament has approved raising the debt ceiling to KD 25 billion, from KD 10 billion. The country has maintained a positive and stable credit profile among the major rating agencies, with one of the strongest factors in support of its ratings being the substantial FX (foreign exchange) assets held by the Kuwait Investment Authority (KIA) – of over $580 billion.
The country benefits from good governance and conservative fiscal policies, with increased oil production and increased public spending on infrastructure, in line with the Kuwait National Development Plan, likely to support growth in 2018. GDP growth from 2019-21 is predicted to exceed 3 percent, supported by increased oil output from 2.7 million barrels/day (current) to 3 million barrels/day in 2021. At present, a sovereign rating downgrade looks very unlikely, although potential risks cited include undiversified government income and rising regional political tension. OPEC’s oil production cuts have also had some impact on Kuwait’s GDP growth.
Why is Kuwait attractive?
Firstly, it has solid fundamentals. With a relatively low fiscal breakeven for oil at $56/bbl, and AA ratings with both S&P and Fitch, this is a robust credit. Kuwait’s ratings should be safe at current oil price levels, with Fitch writing that the potential negative impacts would be ‘erosion of fiscal and external positions’. This implies a focus almost exclusively on oil price and associated negative credit events, and we are confident that it is stable for now.
With limited chance of an adjustment to ratings, Kuwait is therefore an appealing investment grade play. Since the sovereign cannot at present issue longer-term paper – for example of 30 years – there is limited downside potential. The country is stable in the rates and credit market and would not struggle to issue debt of a reasonably large size. Except a massive drop in oil prices or a significant jump in US Treasury yields – to something like 3.5-4 percent in a short period of time – we don’t see considerable risk. If such events were to occur, they would damage sentiment towards emerging markets, but that could happen just as easily due to inflation or growth. In such a scenario, Kuwait would still be attractive, because oil prices would likely increase.
Does Kuwait need to issue?
The short answer is no, and it needn’t be in any rush to do so, with oil prices having risen considerably in 2018. On the other hand, it does make budgetary sense to pre-fund and to be prudent on the funding schedule. Should the sovereign issue, it may be in either the conventional or Sukuk format, and we see no reason not to issue in both. It is very likely that any issuance by the sovereign will be 144A-compliant, and most likely with a tenor of up to 10 years, as Kuwait doesn’t currently have formal approval to issue for a longer period. In terms of volume, we’d expect issuance of between $5 billion and $7.5 billion.
If Kuwait were able to issue longer term paper of 30 years, it would be beneficial to the credit curve, and directly benefit corporates and banks looking to follow the sovereign. In that case, we’d be likely to see names such as Equate Petrochemicals, NBK or Kuwait Projects attempting to tap the market. The only real risks for a sovereign issuance today are considerably higher US Treasury yields and a massively lower oil price environment. How likely are either of these scenarios? Not very. The time is right to issue, and there is an appetite to match it.

Good is CEO and Head of Portfolio Management at Fisch Asset Management.

By Philipp Good


This article was published on 05/06/2018