Kuwait’s government has transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash. Image Credit: Yasmena Al Mulla

Kuwait: Kuwait’s government has transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash to plug a monthly budget deficit of $3.3 billion, a person familiar with the matter said, leaving one of the world’s richest nations with few options to pay its bills.

Fitch on Wednesday cut Kuwait’s outlook to negative from stable, citing “the imminent depletion of liquid assets” in the absence of parliamentary authorization for the government to borrow.” The rating was affirmed at AA.

The assets include stakes in Kuwait Finance House and telecoms company Zain, the person said, asking not to be named because the information is private. State-owned Kuwait Petroleum Corp. was also transferred from the government’s treasury to the $600 billion Future Generations Fund, meant to safeguard the Gulf Arab nation’s wealth for a time after oil. KPC has a nominal value of 2.5 billion dinars ($8.3 billion), the person said.

The Finance Ministry declined to give details about the swaps.

Buring cash reserves

Though Kuwait has one of the highest per capita incomes on earth, years of lower oil prices have forced the government to burn through its cash reserves while a festering political standoff has prevented it from borrowing. Desperate to generate liquidity, the government began swapping its best assets with the FGF for cash last year, but with those now gone, it’s not clear how it’ll cover its eighth consecutive budget deficit, projected at 12 billion dinars for the fiscal year beginning April.

“It’s a very immediate crisis now, not a long-term one like it was before,” said Nawaf Alabduljader, a business management professor at Kuwait University. “The Future Generations Fund is our life jacket but we don’t have a boat to take us to shore, we have no vision. We need to restructure our economy and move away from the welfare state.”

Like its neighbors, Kuwait is contending with the twin pressures of Covid-19 and lower oil prices. Unlike Saudi Arabia and others, however, Kuwaiti lawmakers have blocked proposals to borrow on international markets to cover the fiscal shortfall. Kuwait hasn’t returned to the market since its debut Eurobond issuance in 2017.

Parliamentarians have also opposed any hint of spending cuts, saying the government must reduce waste and corruption before passing the burden onto the public or resorting to debt. The FGF, meanwhile, can’t be touched without legislation, and the idea of dipping into the national savings pot is deeply unpopular. Parliament already passed a law last year exempting the government from transferring the usual 10% of revenues into the FGF during years of deficit.

The swaps have bought the government a few months to push through its borrowing law. If that fails, it could still take a loan from the FGF or the debt plan could issued by decree, though both scenarios are unlikely for now.

Buying time

“They’re just buying time,” said Jassim Al-Saadoun, head of Al-Shall Economic Consultants. “Then they will try to borrow, maybe a local issue first, then go to the international market.”

With 80 per cent of government income based on oil, Kuwait needs crude at $90 to balance the new budget. But benchmark Brent was trading nearer $57 a barrel Tuesday while spending is projected to rise 7 per cent. More than 80 per cent of Kuwaitis are employed by the state and enjoy generous subsidies but strong opposition means the government’s struggled to make even minor cost adjustments.

Parliament’s finance committee began reviewing the borrowing bill again Tuesday, raising expectations of a thaw, but the brinkmanship has created uncertainty.

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S&P Global Ratings already warned last month it would consider downgrading Kuwait in the next six to 12 months if politicians were unable to overcome the impasse.

“In an extreme case, an insufficient policy response could leave Kuwait facing a hard fiscal budget constraint,” S&P said on Jan. 15, “potentially resulting in a disorderly expenditure adjustment that could inflict long-term damage on the economy.”