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Institutional roadblocks present risks
DUBAI, July 17: On July 16, 2021, S&P Global Ratings lowered its long-term foreign- and local-currency sovereign credit ratings on Kuwait to ‘A+’ from ‘AA-’. The outlook remains negative. The rating agency also lowered its short-term foreign and local currency sovereign credit ratings to ‘A-1’ from ‘A-1+’. At the same time, they revised their transfer and convertibility assessment to ‘AA-’ from ‘AA’.
The negative outlook primarily reflects risks over the next 12-24 months relating to the government’s ability to overcome the institutional roadblocks preventing it from implementing a financing strategy for future deficits. S&P could lower the ratings if elevated central government deficits persisted over the medium term, with still no sustainable comprehensive financing arrangements agreed. This could happen, for instance, as a result of continued confrontation between the government and parliament rendering the government unable to implement fiscal reforms, pass the debt law, or authorize other sources of budget financing. “We could revise the outlook to stable if the authorities demonstrated a track record of structural reform implementation that addressed Kuwait’s long-term funding needs, enhanced policymaking, and improved economic prospects,” S&P explained.
The downgrade reflects the persistent lack of a comprehensive funding strategy despite the central government’s ongoing sizable deficits. Due to parliamentary opposition, the government has so far been unable to pass a law giving it the authority to issue debt or gain immediate access to its large stock of accumulated assets. The pace of structural reforms in Kuwait also remains sluggish: the long-discussed adoption of new taxes and broad expenditure adjustments has largely stalled. We consider that these persistent delays could ultimately leave Kuwait more vulnerable to potential future terms-of-trade shocks. We estimate that in the 2020/2021 fiscal year (ending March 2021) Kuwait ran a central government deficit of 33% of GDP, the highest ratio of all sovereigns we rate globally. Oil prices have recovered substantially from last year’s lows, and we expect Kuwait’s oil exports to increase as OPEC+ production cuts are gradually discontinued.
Even so, we forecast Kuwait’s central government deficits will average 17% of GDP over 2021-2024. We estimate the fiscal breakeven oil price currently at over $90 per barrel (/bbl), which is substantially above our medium-term oil price assumptions (see “S&P Global Ratings Raises Short-Term Oil And Gas Price Assumptions On Improving Market Conditions,” published on June 16, 2021). In recent years the government has, on multiple occasions, communicated its intention to accelerate the momentum of fiscal reform, but actual progress remains slow. The 2021/2022 budget was adopted in June with a deficit of 31% of GDP and expenditure increasing in nominal terms by 8.5%, vis-à-vis the 2020/2021 outcome. Although we believe the actual outcome for 2021/2022 will be stronger, partly due to higher-than-budgeted oil prices, we consider that the adopted budget deviates from the stated goals of reigning in the fiscal imbalance and containing expenditure. In contrast to our previous expectations, the central government has yet to put in place a comprehensive funding strategy for these deficits. The expiry of Kuwait’s debt law in 2017 meant that the government has been unable to borrow since, relying instead on the GRF to meet budgetary requirements. This has depleted the GRF.