Fitch Ratings has maintained Kuwait’s long-term foreign-currency issuer default rating at AA- with a stable outlook. This decision is based on the country's robust fiscal and external balance sheets. The rating agency highlights Kuwait’s substantial financial buffers managed by the Kuwait Investment Authority as a key factor supporting the current rating. Nevertheless, Fitch points out that risks persist due to the nation's dependence on hydrocarbons, an oversized public sector, and relatively low governance scores compared to peers.

Public wages and subsidies account for 41% of Kuwait’s Gross Domestic Product (GDP), or 81% of government spending. Despite a strong external balance sheet, Fitch notes that prospects for meaningful structural reforms aimed at reducing oil dependence remain uncertain. Although the government is gradually implementing spending rationalization measures and other reforms, it has faced challenges in this area.

Recently, Kuwait enacted a long-awaited financing law that allows debt issuance for the first time since 2017. This legislation sets a borrowing cap of 30 billion Kuwaiti dinars ($98.1 billion) over 50 years. Since June, authorities have issued 1.2 billion dinars in domestic bonds, equivalent to 2.4% of GDP, which has helped ease pressure on the General Reserve Fund and support local capital market development.

Despite these efforts, Kuwait's progress in diversifying its revenue base remains limited. Non-oil revenue trails behind regional peers, averaging 8% of non-oil GDP between 2022 and 2024, compared to a Gulf Cooperation Council (GCC) median of 10.2%. A new 15% domestic minimum tax on multinational corporations, implemented in January, has been introduced, but the implementation of a value-added tax and the long-planned GCC excise tax seems unlikely in the near term.

Fitch forecasts a reported budget deficit of 5.6% of GDP in fiscal year 2025 under the government’s methodology, which excludes investment income, compared to a 2% surplus the previous year. This widening gap is attributed to declining oil revenues and increased capital expenditures. Including estimated returns from sovereign wealth fund investments, Fitch anticipates a budget surplus of 10% of GDP.

Economic growth is expected to rebound modestly with real GDP projected to grow by 1.7% in 2025 following two consecutive years of contraction due to OPEC+ production limits. Inflation is forecasted to remain below 3% through 2027, and oil production is anticipated to increase gradually. However, Kuwait’s fiscal break-even oil price remains high at $81 per barrel in fiscal year 2025.

Despite the resumption of borrowing, Kuwait's debt levels are expected to rise from 2.9% of GDP in 2024 to nearly 12% by 2027, still significantly below the AA median of 52.4%. Fitch warns of Kuwait’s heightened sensitivity to oil price volatility; a $10 shift in oil prices could affect the budget balance by approximately 4% of GDP.

While Fitch's Sovereign Rating Model assigns Kuwait an equivalent AAA score, qualitative adjustments have reduced the final rating due to limited progress on structural reforms and persistent dependence on oil revenues. Governance performance also poses constraints, with a World Bank Governance Indicator ranking of 54 reflecting low scores in voice and accountability and middling scores across other dimensions.

A potential downgrade could result from geopolitical instability or sustained declines in fiscal and external metrics under prolonged low oil prices. Conversely, a reduction in oil dependence through credible structural reforms could support a future upgrade. The country ceiling remains at AA+, two notches above the sovereign rating, reflecting a low likelihood of restrictions on capital flows or foreign currency transactions.

Regional Context In the Gulf region, ratings vary across countries. The UAE holds AA ratings from all three major agencies due to diversified revenue streams and sovereign assets. Saudi Arabia was upgraded by S&P to A+ in March, while Moody’s maintains an Aa3 rating. Qatar also retains AA/Aa2 ratings with stable outlooks. However, Bahrain remains below investment grade, holding B+ ratings from Fitch and S&P and a B2 rating from Moody’s, reflecting ongoing fiscal and external vulnerabilities.