Kuwait skyline
Global credit rating agency Standard & Poor’s has downgraded Kuwait’s credit ratings to 'A+' from 'AA-' with negative outlook. Image Credit: Shutterstock

Dubai: Global credit rating agency Standard & Poor’s has downgraded Kuwait’s credit ratings to 'A+' from 'AA-' with negative outlook.

“We forecast that Kuwait's central government deficits will average a substantial 17% of GDP annually over 2021-2024. Even so, the government has yet to enact a comprehensive strategy to augment its main source of budget deficit financing, the depleted General Reserve Fund (GRF), the rating agency said in a note.

S&P expects the authorities will adopt a debt law, or overcome parliamentary opposition and gain access to other available funding alternatives such as the Future Generations Fund. However, the prolonged and continued absence of a long-term funding strategy indicates credit risks more in line with our 'A' rating category.

Assessing the deficit situation and the available funding options before the government the rating agency said the negative outlook primarily reflects risks relating to the government's ability to overcome the institutional roadblocks preventing it from implementing a financing strategy for future deficits.

“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,” said Maxim Rybnikov, an analyst at S&P/

Slow fiscal and structural reforms

The pace of structural reforms in Kuwait 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 per cent 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.

S&P has forecast Kuwait's central government deficits will average 17 per cent of GDP over 2021-2024. The e fiscal breakeven oil price currently at over $90 per barrel (/bbl), which is substantially above our medium-term oil price assumptions.

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 per cent of GDP and expenditure increasing in nominal terms by 8.5 per cent, 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 theadopted budget deviates from the stated goals of reigning in the fiscal imbalance and containing expenditure.

The recent rise in oil prices helps relieve 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 adverse future terms-of-trade shocks.

Reform efforts in Kuwait remain complicated by the confrontational relationship between the government and parliament. This has been a recurrent institutional feature, but has recently escalated.

Depletion of budget funding

Kuwait faces risks stemming from the depletion of its main budget financing fund, the GRF. The GRF is the smaller portion 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 earmarked for when oil runs out.

The authorities have taken some steps over the past few months to address the situation. These have included 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. Nevertheless, the adopted measures have so far fallen well short of what would be needed to address the funding gap.

Debt law

Passing the debt law could provide a funding source for Kuwait's fiscal deficits over the next three years. A more-structural approach aimed at reducing wasteful subsidies and raising revenue through alternative sources could provide longer term stability.