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Kuwait’s anti borrowing stance about to wilt under the pressure; aims to seek $20 billion in loans

2020’s crude price shortfall in a year when COVID-19 cramped economies and restricted travel is forcing the Gulf state to rethink its position on borrowing

The state oil company of Kuwait plans to borrow as much as $20 billion over the next 5 years Oil accounts for 90% of Kuwait’s revenue Rating agency Fitch last month downgraded its outlook on Kuwait’s sovereign debt rating to “negative” from “stable”

The Kuwaiti government has proposed new amendments to the country’s public debt law, including capping borrowing to a maximum 60% of GDP, the head of a parliamentary finance committee told Reuters.

While this has not been passed, 2020’s crude price shortfall in a year when COVID-19 cramped economies and restricted travel is forcing the Gulf state to rethink its position on borrowing,

Seeking $20 billion

The state oil company of Kuwait plans to borrow as much as $20 billion over the next 5 years to make up for an expected shortfall in funding, a person familiar with the matter said.

Kuwait Petroleum Corp. (KPC) will need the money to maintain the petrostate’s crude-production levels, said the person.

The company remits almost everything it generates from crude sales to the Kuwait government. It then gets reimbursed in installments to fund capital expenditure, mainly for upstream operations and investments in oil fields. 

KPC plans to cover the shortfall by issuing debt, including on international markets. The situation will be reviewed every six months to assess the company’s needs and borrowing costs.

Kuwait’s government faced a cashflow crisis in 2020 and it instructed KPC to transfer more than 7.5 bn dinars ($24.82 bn) in dividends to the Treasury.

KPC has since reached a preliminary agreement to repay the sum over 15 years.  

Oil accounts for 90% of Kuwait’s revenue. The nation pumps around 2.4 million barrels of crude a day, the biggest OPEC member.   

Kuwait is meanwhile trying to cut spending as KPC has slashed capital-expenditure projections for the next 5 years by more than 30%. 

The company has hired a consultant to help merge eight subsidiaries into four to streamline operations by the end of 2022, the person said.

Read: Kuwait population drops as expats leave, residency permits get canceled

Read: Kuwait won’t take loans as deficit deepens and reforms remain on the backburner

Can Kuwait’s SWF run out of cash?

Last month, the Kuwaiti government sought permission from parliament to withdraw money from the sovereign wealth fund (SWF) for the first time since the aftermath of the Gulf War in 1990.

Kuwait’s General Reserve Fund (GRF) used to cover state deficits has been squeezed by the coronavirus-driven drop in oil prices and a continued stand-off between government and parliament on implementing measures such as a law to allowing state borrowing.

The fund raised about $19.87 bn to $23.19 bn in recent months through asset swaps with Kuwait’s Future Generations Fund (FGF), a nest egg for when the country’s oil runs out, and thanks to money returned to the GRF after a law last year halted a mandatory annual transfer of 10% of state revenue to FGF.

“Authorities have taken steps to mitigate the depletion of the liquid assets in the GRF. We estimate this lengthened the timeline for the depletion of GRF liquidity until 3Q21,” BofA said in a report dated March 17.

Rating agency Fitch last month downgraded its outlook on Kuwait’s sovereign debt rating to “negative” from “stable”.

“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,” Fitch said.

Bloomberg said: “Kuwait is likely to have the biggest improvement in its budget balance from high oil levels, with its shortfall narrowing by around 15 percentage points of GDP this year. Still, the sovereign is facing a liquidity squeeze that ‘cannot be remedied by higher oil prices alone.”