Kuwait's rating under threat

Moody's could lower Kuwait's sovereign ratings if the tension between the ruling family and parliament escalates.

The government of Kuwait could face a credit rating downgrade as a result of continuing political turmoil, a major agency said Tuesday. In the past few months, conflicts between Kuwait's ruling family and its parliament have hindered the government's ability to address the local effects of the financial crisis and threatened its stability, analysts have said.

In March, Moody's placed the government's credit rating on review for a possible downgrade as a result of the strife. Since then, it has decided not to lower Kuwait's ratings, although it noted that a downgrade was still possible if political conditions worsened. "Moody's ? has confirmed Kuwait's 'Aa2' sovereign ratings but has applied a negative ratings outlook," the agency said in a statement. "Moody's is concerned by the conflictual relationship between the government and the parliament which, in our opinion, is causing a gradual erosion of institutional strength."

The Kuwaiti crisis has been driven by tension between its parliament and ruling family, which has called for the dissolution of parliament several times in the past year. Recent political struggles have delayed an economic stimulus bill worth about US$5 billion (Dh18.36bn) and led to cancellations of multibillion-dollar projects. Analysts have said such unpredictability could threaten the country's reputation as a place of investment at a time when foreign funding was most needed.

Last month, Kuwait held its second parliamentary elections in a year after an order from the emir, Sheikh Sabah Al Ahmad Al Sabah, to dissolve the parliament. That followed requests from politicians for the prime minister, Sheikh Nasser Al Mohammed Al Sabah, to appear before legislators for questioning over his alleged misuse of public funds. Since the election of a new legislature, recent requests for similar questionings have led observers to doubt that the poll helped to stabilise the country's political system.

"Institutional strength and policy predictability form a core consideration in Moody's sovereign bond rating methodology and are particularly important for inclusion in the highest rating categories," Moody's said. "The erratic and tumultuous policy environment in Kuwait has somewhat weighed on Moody's opinion of Kuwait's sovereign creditworthiness. "Kuwait's ratings would be lowered should the discord between the government and parliament translate into a more significant degree of political inefficiency that weakened the ability of the authorities to address potential economic and financial challenges."

Moody's noted that Kuwait still merited a "very high investment grade" rating, given its strong government balance sheet, surpluses and extensive oil reserves. Among the specific ratings affected by Tuesday's action were Kuwait's local and foreign currency government bond ratings, and its ceiling for foreign currency bank deposits. Bahrain also recently received a negative ratings outlook from Moody's amid concerns over the country's dependence on volatile oil prices.

Since the start of the global financial crisis, many Kuwaiti investment companies have struggled and some have even defaulted on debts. Last month, Investment Dar, the Kuwaiti investment firm that owns half of the car maker Aston Martin, announced it had defaulted on a $100 million Islamic bond. In December, Global Investment House (GIH), another Kuwaiti company, failed to make a payment on a $200m loan, leading to a series of credit downgrades and defaults. Global is also still negotiating with lenders over a reorganisation.

Also Tuesday, GIH had its ratings withdrawn from Fitch Ratings, another credit ratings agency. Fitch affirmed the company's long-term issuer default rating of "D", indicating default, and said it would no longer provide analytical or rating coverage for the company. [e-mail]