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Kuwait fuel reforms credit positive says Moody's

KUWAIT, August 9, 2016

Kuwait's move to raise fuel prices is credit positive for the sovereign because they will lower current expenditures and bolster government finances dented by the downturn in global oil prices, while reducing wasteful overconsumption, Moody's Investor Service has said.

Kuwait’s cabinet has approved a series of fuel-related subsidy reforms, including an 83 per cent increase in higher-quality ultra-premium petrol prices and a 42 per cent increase in lower-quality octane-91 petrol prices, which will go into effect on September 1.

Kuwait has been slower than regional peers in developing its non-oil and private sectors and is particularly vulnerable to oil price declines because oil- and gas-related revenues have historically accounted for around 80 per cent of government revenues, although this decreased to 70 per cent in 2015 because of the sharp drop in oil prices.

Total revenues declined by approximately 41 per cent in 2015, and we expect another 14 per cent decline this year, Moody's said. "At the same time, total expenditures declined 16.5 per cent in 2015, but they are budgeted to increase by 1.8 per cent in 2016," it added.

"Although fiscal gains this year from subsidy reform are likely to be moderate, we expect gains to accelerate should oil prices increase because the government will review prices every three months to ensure that they move in tandem with global rates. Kuwait budgeted about $7.8 billion, or 6.4 per cent of GDP, to cover the cost of all subsidies in 2015, according to the International Monetary Fund (IMF). On top of this direct cost, the IMF estimates that the opportunity cost from low energy prices in Kuwait was 7.4 per cent of GDP in 2015," it said.

The inflationary effect of fuel subsidy reform will likely be moderate because energy products make up only 2.63 per cent of the Kuwaiti consumer price index basket, Moody's said.

The cabinet decision follows adjustments to diesel and kerosene prices last year. In January 2015, the government raised the price of diesel and kerosene from $0.18 per litre to $0.56 per litre, but a month later, revised down these prices by about 35 per cent to $0.36 per litre following public discontent. The government’s ability to successfully implement the price hikes this time around will be indicative of its institutional capacity to move its economy beyond oil, it added. - TradeArabia News Service




Tags: Kuwait | Credit |

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