Kuwait resorts to support from wealth fund to unlock cash

Resorting to the sovereign fund as a way out of the crisis is expected to draw opposition from parliament.
Thursday 04/02/2021
Kuwaiti MPs attend a parliament session at the national assembly in Kuwait City. AFP
Kuwaiti MPs attend a parliament session at the national assembly in Kuwait City. (AFP)

KUWAIT CITY--Kuwaiti Finance Minister Khalifa Musaed Hamada said Wednesday that Kuwait’s financial position is “strong and solid” as the country can rely on its Reserve Fund for Future Generations to fix the liquidity problem, in a move aimed at reassuring Kuwaitis following credit rating agency Fitch’s move to downgrade the country’s sovereign debt outlook from “stable” to “negative.”

In a statement to the media, Hamada said that the state’s public finances suffer from structural imbalances related to annual revenues and expenditures that “led to the near depletion of liquidity in the state treasury” represented by the General Reserve Fund.

The minister noted that one of the executive authority’s top priorities is to “enhance the liquidity of the treasury,” stressing the need for concerted efforts from all parties and to work as one team to achieve public finance sustainability.

Resorting to the sovereign fund as a way out of the crisis is expected to draw opposition from parliament due to its serious implications for future Kuwaiti generations, as well as what observers believe to be an attempt to cover up the government’s failure to prepare for the difficult financial situation.

Kuwait currently deducts, by law, at least 10% of its annual revenue for the Future Generations Reserve Fund, which is managed by the General Investment Authority.

Kuwait, a member of OPEC, has been hit hard by the coronavirus pandemic and a steep decline in oil prices, the main source of more than 90% of government revenue.

Recurrent disagreements and crises between the government and elected members of parliament led to several cabinet reshuffles and the dissolution of parliament, which impeded badly needed economic reforms.

Despite the direct factors that led to Kuwait’s crisis, most political and economic analysts attribute its underlying causes to accumulated errors as well as the depletion and misappropriation of resources that occurred for a long period and prevented the country from investing huge oil revenue that was secured in years of abundance.

The analysts point to the country’s failure to diversify resources and break away from its dependence on oil. They also blame the country’s social policy, which they say has been overly generous by providing grants and donations to citizens. This policy, they argue, has encouraged citizens to be dependent on the state rather than contributing to the country’s wealth.

Fitch revised Kuwait’s Long-Term Foreign-Currency Issuer Default Rating (IDR) outlook to “negative” from “stable” and affirmed the IDR at “AA.”

The agency said “the imminent depletion of liquid assets” and “absence of parliamentary authorisation for the government to borrow” was creating uncertainty. Its report follows S&P Global Ratings’ recent warning that it would consider downgrading Kuwait in the next six to 12 months if politicians fail to overcome the impasse.

Fitch also said the base case is that the government will replenish the General Reserve Fund to avoid depletion even without any new legislation by parliament and that debt service — about 400 million dinars ($1.3 billion) or 1% of its 2021 GDP  — would continue in a timely manner.

Kuwaiti authorities have demonstrated commitment to avoiding a liquidity crisis, the agency noted, adding they have flexibility to take extraordinary measures, but the timing of a sustainable funding solution remains unclear.

Fitch expects the general government deficit to widen to about 6.7 billion dinars ($22.11 billion), or 20% of GDP, in the Recipient’s Fiscal Year 2020 (FY20). Its fiscal deficit will likely remain in the double digits in the medium to long term.

Though Kuwait is a high-income country, years of lower oil prices have forced it to burn through its reserves.

Desperate to generate liquidity, the government began last year swapping its best assets for cash with the $600 billion Future Generations Fund, which is meant to safeguard the Gulf Arab nation’s wealth for a time after oil.

With those now gone, it’s not clear how the government will cover its eighth consecutive budget deficit, projected at 12 billion dinars ($39.6 billion) for the fiscal year beginning April.

The assets include stakes in Kuwait Finance House and telecoms company Zain, a person familiar with the matter said, asking not to be named because the information is private.

State-owned Kuwait Petroleum Corp., which has a nominal value of 2.5 billion dinars ($8.3 billion), was also transferred from the government’s treasury in January.