FITCH CUTS OUTLOOK TO NEGATIVE ON DEBT GRIDLOCK

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Kuwait affirms strength after rating

KUWAIT CITY, Feb 3, (Agencies): Interim Minister of Finance Khalifa Musaed Hamada has confirmed that the financial position of the country is strong, while stressing the need for hard work to change the outlook which will pave way for the implementation of reforms concerning public funds. In a statement released by the Media Center of the ministry, Hamada reacted to Fitch’s AA rating for Kuwait; particularly the change of outlook from ‘stable’ to ‘negative’. He said the financial position of the country remains strong and solid, owing to the support of the Future Generations Fund.

He affirmed the fund is growing continuously and attributed this growth to the tremendous efforts being exerted by those tasked to manage the fund. He admitted there are structural imbalances in public funds related to annual revenues and expenditures; such that the liquidity of the General Reserve Fund has been on the verge of depletion. He added: “One of our most important priorities in the executive authority in the next stage is to enhance the liquidity of the treasury. As we emphasized previously, this needs the concerted efforts of all parties which should work as one team to guarantee the sustainability of public funds.”

Key rating drivers
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 authorisation for the government to borrow. This risk is rooted in political and institutional gridlock that also explains the lack of meaningful reforms to tackle double-digit fiscal deficits and the expected weakening of Kuwait’s fiscal and external balance sheets, although these will remain among the strongest of Fitch-rated sovereigns. 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. Our base case is that government will replenish the GRF to avoid depletion even without any new legislation by parliament, and that debt service (about KWD400 million or 1% of GDP in 2021) would in any case continue in a timely manner. Nevertheless, a degree of uncertainty remains.

The authorities have shown commitment to avoiding a liquidity crisis and have flexibility to take extraordinary measures, but the timing of a sustainable funding solution remains unclear. In August, parliament passed legislation removing the automatic requirement to transfer 10% of revenue from the GRF into the much larger Future Generations Fund (FGF). This allowed for the reversal of the transfer for the fiscal year ending March 2019 (FY18), and followed the purchase of liquid assets from the GRF by the FGF. The GRF still has a broad range of illiquid assets that could also be transferred to the FGF, including the Kuwait Petroleum Corporation (KPC). The GRF could also borrow from the FGF, as it did during the Iraqi invasion in 1990-1991, although this is not an option that the government is considering at this stage. Under Kuwait’s constitution, the Amir could issue decrees with the force of law, although this option would be politically contentious, in our view.

Debt law
Passage of the debt law, deficit reduction and fiscal reform continue to be beset by entrenched political divisions and fiscal rigidities, with over 70% of government spending consisting of salaries and subsidies and about 80% of Kuwaiti nationals employed in the public sector. With political parties banned, members of parliament (MPs) tend to be elected on narrow, populist platforms and frequently conflict with an appointed government. This trend is likely to continue after gains by the opposition in the December 2020 elections.

In January 2021, the government resigned after opposition MPs moved to “grill” the prime minister, although the Amir swiftly re-appointed him. The prime minister, a senior royal family member, was appointed after the last government resignation in November 2019. Another no-confidence motion in October 2020 was forestalled by the passing of the late Amir.

We expect the general government deficit to widen to about KWD6.7 billion (20% of GDP) in FY20, including in revenue the estimated investment income of the Kuwait Investment Authority (KIA), which is not officially disclosed and mostly relates to the FGF. We expect revenues to fall 33% to a little over KWD14 billion (42% of GDP), driven by lower oil prices and production. Spending will be in line with the previous fiscal year at KWD21 billion (62% of GDP), slightly below the final budget. The government allocated a total of KWD740 million (less than 2% of GDP) in additional spending to fight the coronavirus and support the private sector, which was offset by savings elsewhere, including lower subsidies, which vary with oil prices.

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