Dubai: Rating agency Standard & Poor’s has revised its sovereign credit rating outlook of Kuwait to negative from stable.
The negative rating outlook, S&P said, primarily reflects its view of risks stemming from fiscal pressure, including the likely depletion of the General Reserve Fund (GRF), the government’s main source of budget funding, while alternative financing arrangements are not yet in place, S&P said in a note.
“We forecast that, as a result of lower oil prices, implementation of the April 2020 OPEC+ oil production cuts, and the COVID-19 pandemic, Kuwait’s central government deficit will widen to almost 40 per cent of GDP in 2020 from an estimated 10 per cent in 2019,” said Maxim Rybnikov, a credit analyst with S&P.
The rating agency estimates that estimate that the government’s main source of budget deficit funding, the General Reserve Fund, will be insufficient to cover this deficit on its own.
A timely and sufficient policy response to address a potential hard budget constraint in the coming months has yet to emerge. We are consequently revising our outlook on Kuwait to negative from stable and affirming the ‘AA-/A-1+’ sovereign ratings, S&P said.
Rationale
The outlook revision primarily reflects the rating agency’s view of risks stemming from the continued depletion of the GRF, the government’s main fiscal liquidity buffer, given that the authorities are yet to adopt a timely alternative funding strategy.
The GRF has been the sole funding source for deficits at central government level since October 2017, when the debt law expired and it was no longer possible to issue government debt.
Uncertain funding
“We note that the GRF balance has been steadily reducing over the past three years, but this process has accelerated in recent months following the decline in oil prices and Kuwait’s implementation of the OPEC+ oil production cut agreement in March-April 2020, which has adversely affected revenue,” said Rybnikov.
Although full details on the GRF’s current position are not available, S&P estimates that the GRF alone will be unable to fund a deficit of that magnitude. Meanwhile government could implement several short-term measures to mitigate continued GRF depletion; a combination of which S&P expects will be introduced in the coming weeks. These measures include the suspension of a 10 per cent of revenue transfer to the Future Generations Fund (FGF), which together with GRF comprises the sovereign wealth fund, the Kuwait Investment Authority (KIA); the FGF extending a loan to the GRF; or the FGF providing cash in return for other GRF assets.
The authorities have so far been reluctant to directly draw on FGF assets, which are mainly earmarked for future generations. FGF assets are estimated around 400 per cent of GDP at the end of 2019, but ordinarily they cannot be drawn upon without parliamentary approval.
A long-term, sustainable funding policy has also yet to be put in place, while risks to the government’s short-term funding sources remain. In the past, Kuwait’s parliament has opposedpassing a law to allow the government to issue debt.
S&P anlysts said substantial policy measures in 2020 could be particularly challenging given the political cycle, with upcoming arliamentary elections in November 2020. “In our view, lack of a prompt solution to Kuwait’s funding arrangements could have a number of negative longer-term economic consequences,” said Rybnikov.
