The fuel price reforms by Kuwait are credit positive for the oil-rich Gulf sovereign as they will lower its current expenditures and bolster government finances dented by the downturn in global oil prices, according to US ratings agency Moodys Investors Service.
Moodys currently rates Kuwait Aa2 with a negative outlook and says the reforms will also help in reducing wasteful overconsumption.
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 they move in tandem with global rates, Moodys said in a statement.
Kuwait has budgeted about $7.8bn, or 6.4 per cent of its GDP, to cover the cost of all subsidies in 2015. On top of this direct cost, the Washington-based IMF estimates that the opportunity cost from low energy prices in the country was 7.4 per cent of GDP in 2015, the statement added.
Kuwaits cabinet on 1 August 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 1 September.
The effect of fuel subsidy reform on inflation will likely be moderate because energy products make up only 2.63 per cent of the Kuwaiti consumer price index basket, according to Moodys.
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 a litre to $0.56 a litre, but a month later revised down these prices by about 35 per cent to $0.36 a litre following public discontent.
The governments ability to successfully implement the price hikes this time around will be indicative of its institutional capacity to move its economy beyond oil, Moodys said in the statement.
Hydrocarbons-reliant economies of the GCC have faced significant economic challenges after oil prices fell from a mid-2014 peak of more than $110 a barrel. The Gulf states have cut spending and have reduced subsidies for fuel and public utilities, which run into billions of dollars annually. Some countries have frozen or slowed the growth of public sector wages as they try to plug budget deficits in the wake of reduced falling oil revenues, their main source of income.
Kuwait has been slower than its regional peers in developing its non-oil and private sectors, and is particularly vulnerable to oil price declines as oil and gas-related incomes have historically accounted for about 80 per cent of government revenues, Moodys said.
Saudi Arabia, Opecs biggest oil exporter, the UAE, Qatar, Oman and Bahrain have all taken such steps in recent months. Kuwait had hinted at such moves previously, but has now followed the other Gulf countries in making major reforms to its energy subsidies.