Dubai: Global rating agency Standard & Poor’s downgraded Kuwait’s credit ratings to “A +” from “AA-” with a negative outlook.
âWe expect Kuwait’s central government deficits to average 17% of GDP per year over the period 2021-2024. Despite this, the government has yet to adopt a comprehensive strategy to increase its main source of funding the budget deficit, the depleted General Reserve Fund (GRF), the rating agency said in a note.
S&P expects the authorities to pass a debt law or overcome parliamentary opposition and have access to other available funding alternatives such as the Fund for Future Generations. However, the prolonged and continued absence of a long-term funding strategy indicates credit risks more in line with our âAâ rating category.
Assessing the deficit situation and the financing options available to the government, the rating agency said the negative outlook primarily reflects risks to the government’s ability to overcome institutional obstacles preventing it from implementing a strategy. funding for future deficits.
âThe deterioration reflects the continued absence of a comprehensive financing strategy despite the central government’s sizable deficits. Due to parliamentary opposition, the government has so far been unable to pass a law giving it the power to issue debt or immediately access its large stock of accumulated assets â said Maxim Rybnikov, analyst at S & P /
Slow fiscal and structural reforms
The pace of structural reforms in Kuwait remains slow: the long-discussed adoption of new taxes and sweeping spending adjustments has largely stalled. We consider that these persistent delays could ultimately make Kuwait more vulnerable to potential future terms-of-trade shocks.
We estimate that in fiscal year 2020/2021 (ending March 2021), Kuwait recorded a central government deficit of 33% of GDP, the highest ratio of any sovereign state we assess in the world. Oil prices have recovered significantly from last year’s lows, and we expect Kuwait’s oil exports to increase as OPEC + production cuts are phased out.
S&P has forecast that Kuwait’s central government deficits will average 17% of GDP over the 2021-2024 period. The balanced oil price is currently over $ 90 per barrel (/ bbl), which is significantly higher than our medium-term oil price assumptions.
In recent years, the government has repeatedly signaled its intention to step up the momentum of tax reform, but real progress remains slow. The 2021/2022 budget was adopted in June with a deficit of 31% of GDP and expenditure up 8.5% in nominal terms, compared to the 2020/2021 result. Although we believe that the actual result for 2021/2022 will be more solid, in part due to higher than expected oil prices, we consider that the adopted budget deviates from the stated objectives of reducing the fiscal imbalance and controlling expenses.
The recent rise in oil prices is helping to ease some immediate pressures, but could also mean that the government’s structural reform plans are further delayed. This would then leave Kuwait less prepared for any future adverse terms of trade shocks.
Reform efforts in Kuwait remain complicated by the adversarial relationship between government and parliament. This has been a recurring institutional feature, but has recently intensified.
Depletion of budget funding
Kuwait faces risks associated with the depletion of its main budget financing fund, the GRF. The GRF is the smallest part of the country’s sovereign wealth fund, the Kuwait Investment Authority (KIA). Due to parliamentary opposition, the government has so far been unable to gain immediate access to the much larger FGF, which is intended for oil depletion.
Authorities have taken steps in recent months to remedy the situation. These include suspending annual transfers from the GRF to the FGF and injecting additional liquidity into the GRF by transferring some less liquid assets to the FGF, including the national oil company, Kuwait Petroleum Corp. However, the measures adopted have so far declined significantly. below what would be needed to close the funding gap.
Passage of the debt law could provide a source of funding for Kuwait’s budget deficits over the next three years. A more structural approach to reduce unnecessary subsidies and increase income from other sources could provide longer-term stability.