Kuwait’s government has transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash to plug its budget deficit after a political dispute over borrowing left one of the world’s richest nations short of cash and prompted Fitch to cut its outlook to negative.
Fitch’s report follows S&P Global Ratings’ recent warning that it would consider downgrading Kuwait in the next six to 12 months if politicians fail to overcome the impasse.
Though it’s a high-income country, years of lower oil prices have forced Kuwait to burn through its reserves.
To generate liquidity, the government began last year swapping its best assets for cash with the $600 billion Future Generations Fund, which is meant to safeguard the Gulf Arab nation’s wealth for a time after oil. With those assets now gone, it’s not clear how the government will cover its eighth consecutive budget deficit, projected at 12 billion dinars ($40 bn) for the fiscal year beginning April.
The assets include stakes in Kuwait Finance House and telecoms company Zain, according to Bloomberg.
State-owned Kuwait Petroleum Corp., which has a nominal value of $8.3 bn, was also transferred from the government’s treasury in January, Bloomberg added.
Unlike Saudi Arabia and others, Kuwaiti lawmakers have blocked proposals to borrow on international markets to cover the fiscal shortfall.
Though nearly three-quarters of the budget is dedicated to public sector salaries and subsidies, parliamentarians have also opposed any hint of spending cuts, saying the government must reduce waste and corruption before passing the burden onto the public or resorting to debt.
With 80% of government income based on oil, Kuwait needs crude at $90 to balance the new budget.
Kuwait would be looking at “either the imposition of high taxes,” said Talal Fahad Alghanim, former CEO of Boursa Kuwait, “or, if the government fails to convince parliament, the central bank will have to resort to devaluing the dinar.”
Fitch Ratings has revised the Outlook on Kuwait’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable.
The revision of the Outlook reflects near-term liquidity risk associated with the imminent depletion of liquid assets in the General Reserve Fund (GRF) in the absence of parliamentary authorization for the government to borrow.
Without passage of a law permitting new debt issuance, the GRF could run out of liquidity in the coming months without further measures to replenish it. Depletion of GRF liquidity would sharply limit the government’s ability to make good on its spending obligations and could result in significant economic disruption.
Kuwait has a debt service of about 400 million dinars ($1.3 bn) or 1% of GDP in 2021.
About 80% of Kuwaiti nationals employed in the public sector.
We expect the general government deficit to widen to about $22 bn (20% of GDP) in FY20.
“We expect revenues to fall 33% to a little over $46.26 bn (42% of GDP), driven by lower oil prices and production. We also expect a fiscal deficit of about $25 bn (21% of GDP) in FY21, assuming an average oil price of $45 and average production of 2.4 million bpd,” said Fitch.
Fitch expects Kuwait’s economy to stage a mild economic recovery this year as the dual shocks of oil production cuts and the coronavirus begin to fade.
“We estimate that real GDP contracted by about 7% in 2020, with the oil sector contracting by 9% and the non-oil sector by 4%,” said Fitch.