The credit rating agency “Fitch” said the negative outlook of Kuwait’s sovereign rating reflects the near-term liquidity risks associated with the imminent depletion of liquid assets in the General Reserve Fund in the absence of the government’s parliamentary mandate to borrow, reports Al-Rai daily. Fitch added this risk is rooted in the political and institutional stalemate, which also explains the lack of meaningful reforms to address the double-digit fiscal deficit, and the expected weakness in Kuwait’s balance sheet and external budgets, although it will remain among the strongest sovereign countries rated by the agency. “Fitch” pointed out that without passing a law allowing the issuance of new debt, the liquidity of the General Reserve Fund could be drained in the near term without taking further measures to renew it, adding that the depletion of the fund’s liquidity would sharply limit the government’s ability to meet spending commitments and could lead to major economic disruption. Nevertheless, the agency believes that a new debt law will be passed and that the government will renew the resources of the General Reserve Fund again to avoid depletion even if no new legislation is passed by the National Assembly, expressing confidence that the debt service will continue in any case in the appropriate time, however, there is still a degree of uncertainty.
Fitch expected that the fiscal deficit would halve, but it is still large at 11%, in the fiscal year ending in March 2022. It is likely that the deficit will remain within decimal places for the fiscal years 2022 and 2023, assuming that oil prices fall again to $54 per barrel on average. Fitch pointed out that there is a significant positive aspect to these expectations in light of the dynamics of the oil market, as the increase in the oil price by $10 per barrel helps Kuwait’s budget by more than 6% of the GDP. According to Fitch’s estimates, “the financial breakeven point for the oil price in Kuwait’s budget will drop to less than $80 a barrel in the 2022 fiscal year, due to the rise in oil production in line with the gradual (OPEC+) level, ruling out major financial reforms in Kuwait, which makes the budget vulnerable to fluctuations in oil prices.” Fitch said Kuwait’s public sector balance sheet will likely remain among the strongest sovereign budgets rated by the agency, even assuming little fiscal reform and no recovery in oil prices or production.
According to its estimates, the foreign assets managed by the KIA, most of which are in the Future Generations Fund, amount to about $580 billion, which represents the bulk of Kuwait’s sovereign net foreign assets position, which is about 550 percent of GDP. On the other hand, Fitch indicated that adopting a clear and sustainable government financing strategy will have a positive impact on Kuwait’s rating. By contrast, the agency noted that depleting the General Reserve Fund in the absence of a new debt law, legislation allowing access to the Future Generations Fund or other exceptional measures to ensure that the government can continue to meet its payment obligations, including for example, but not limited to debt service, it will have a negative impact on the rating, in addition to the continued erosion of financial and external positions, for example due to the continuation of the period of low oil prices or the inability to address the structural drain on public finances.
Fitch indicated in its report that 4 out of 14 countries in the Middle East and North Africa have a negative outlook, after reviewing the future outlook of Saudi Arabia to stable in July thanks to the significant improvement in oil price expectations, namely Kuwait, Jordan, Oman and Tunisia. She added, “The negative future outlook for the ratings of Jordan and Kuwait (since February), the Sultanate of Oman and Tunisia (which was downgraded in July) reflects the continuing negative repercussions on public and external finances and growth as a result of the pandemic and the uncertainty surrounding liquidity and financing in Kuwait and Tunisia.”