By Hassan Jivraj

Kuwaiti parliamentarians are set to debate the public debt law once again this year. There are growing calls from the new finance minister, global economists as well as the International Monetary Fund (IMF) to pass the legislation to help the country prepare its public finances for the future.

In its latest report, the IMF estimates that Kuwait’s average annual financing will be around 20% of GDP or approximately KD55 billion ($180 billion) over the next six years.[1] In 2019 Kuwait recorded a surplus of 5.5% of GDP, but this could be reversed to become a deficit by 2025, according to the Fund.[2]

The IMF’s calculations come shortly after the Kuwaiti government disclosed the budget for the fiscal year 2020-2021 (beginning in April) with the deficit ballooning to around $30 billion.[3] This represents an increase of around 19% compared to the previous year.[4]

The budget assumes an oil price of $55 per barrel and is after the mandatory 10% transfer of state revenue into the Future Generations Fund (FGF).[5] Spending for the fiscal year 2020-2021 is set to be flat at around KD 22.5 billion ($73.9 billion). While this does not represent a projected rise in overall spending, it instead reflects a projected drop in revenues from KD 16.3 billion to KD14.8 billion. This is a key reason for the budget deficit increase.[6]  Around 71% of spending in the upcoming fiscal year will be for public sector salaries and subsidies[7].

Source-NBK Research [8]

Mariam Al-Aqeel, Kuwait’s finance minister has said that the government would cover the deficit via the Treasury or through General Reserve Fund (GRF) reserves. She has also vowed that the government would also fight to pass the debt law.

However, it is likely that the administration will face several hurdles including scrutiny from opposition MPs as well as parliamentary elections towards the end of this year.

Kuwait’s journey in international bond markets

The collapse in global oil prices in mid-2014 resulted in GCC states running budget and fiscal deficits for the first time in 20 years. This prompted once surplus rich nations to update their local laws to issue debt locally and abroad.

Due to its constitution, Kuwait’s journey in international bond markets has been a balancing act. The finance ministry established the debt management office (DMO) in 2016 to help manage the bond sale.

In March 2017, the sovereign issued an $8 billion dual tranche bond ($3.5 billion 2.8% 2022 note and a $4.5 billion 3.6% 2027 piece).[9] The deal was oversubscribed and received orders of around $20 billion.[10]

At the time, the deal received some criticism from segments of Kuwait’s political and business class over corruption and wastefulness. They argued that this resulted in a budget deficit which forced Kuwait to issue international sovereign debt for the first time it is history.

Since October 2017 however, the existing provision expired and the sovereign has been unable to issue bonds internationally. As a result it has been relying on the GRF.

Authorities have been seeking to raise the debt ceiling from $33 billion to $82 billion as well as the ability to issue bonds at longer tenors.[11] The previous provision only allowed bond tenors to be 10-years. Furthermore, the law restricts the use of public assets in transactions, meaning that sovereign is unable to structure sukuk.

Reasons for passing the law

According to various estimates, with low oil prices and current rate of government spending, GRF reserves are likely to be depleted within the next two years. While the government could draw upon funds from the FGF, this would require a law change. Both the GRF and FGF are vehicles of the Kuwait Investment Authority (KIA), the oldest sovereign wealth fund in the world. The KIA has around $400 billion in assets or 410% of GDP-end of 2019, according to the IMF.[12]

The slowing non-oil revenues as well as the absence of economic reforms or a debt law is pressuring the budget.[13] NBK forecasts that the budget deficit is likely to widen from 3% to 8% this year.[14] A debt law would slow the drawdown of around KD20 billion ($65.7 billion) or so in the GRF used to finance the budget shortfall.[15]

A public debt law would enable the government to borrow more abroad and at cheaper levels than in 2017. Lower interest rates in the US as well as Kuwait’s high sovereign credit rating enables it to issue debt at more competitive rates. Furthermore, Kuwait’s inclusion in the JPMorgan Emerging Market Bond Index (EMBI) makes it attractive to international investors.

The law would allow the government to issue bonds at longer tenors thereby appealing to different investors like global pension funds. In particular, Asian-based bond investors have increased their exposure to GCC sovereign bonds over the last few years.[16]

The public debt law would also provide regulations for sukuk. While authorities introduced a sukuk framework in late 2015, Kuwait lacks a comprehensive regulatory framework for sukuk issuance.[17] The law would allow the issuance and listing of local sukuk.[18] Through international sovereign sukuk issuances, Kuwait could attract Islamic fixed-income investors from both the GCC and South-East Asia.

A further added benefit of a public debt law is that it would provide a pricing curve for Kuwaiti issuers to refer to, when selling bonds or sukuk internationally.

Compared to GCC neighbours

In comparison to its neighbours, Kuwait remains in a strong fiscal position due to its low public debt levels and fiscal buffers. Other countries have significantly increased their debt levels since mid-2014. Most notably, Saudi Arabia, Oman and Bahrain have all increased their foreign debt over the last four years.

Assuming that there is no legal restriction on borrowing, the IMF forecasts that to finance the remaining gap, Kuwait’s debt would have to rise to over 70% of GDP in 2025 from around 15% in 2019.[19]

Kuwaiti domestic politics

The public debt law, the introduction of the GCC-VAT as well as subsidy reforms remain a contentious issues between the cabinet and parliament.

It is unlikely that the current parliament will approve the public debt law. The cabinet was only formed in December 2019, following the previous government’s resignation over allegations of corruption and mismanagement.[20]

The incoming budget has already come under attack from MPs who accuse the government’s fiscal mismanagement leading to the deficit. Some parliamentarians have warned Sheikh Sabah al-Khalid al-Hamad al-Sabah, the new prime minister, that he will face a grilling should the government impose austerity measures on the population.[21]

Therefore, the installation of a new government and upcoming parliamentary elections as well regional geopolitical events, will mean that the debt law will not be passed. As a result Kuwait will continue to rely on its reserves and a rebound in global oil prices.

Nonetheless, major rating agencies like S&P and Moody’s maintain their faith in Kuwait’s fiscal position, despite internal and regional politics and a lack of economic reform implementation.

[1] https://www.imf.org/en/News/Articles/2020/01/24/mcs012720-kuwait-staff-concluding-statement-of-the-2020-article-iv-mission

[2] Ibid

[3] https://www.nbk.com/dam/jcr:d5a2237e-2273-4d83-9ec1-2d83033ad9f6/NBKMENAOutlookKuwait20191218E.pdf

[4] Ibid

[5] Ibid

[6] https://www.reuters.com/article/kuwait-economy-budget/update-1-kuwait-deficit-to-widen-with-2020-2021-budget-on-lower-revenues-idUSL8N29J4RI [7] https://thearabweekly.com/kuwait-budget-forecasts-record-deficit

[8] https://www.nbk.com/dam/jcr:d5a2237e-2273-4d83-9ec1-2d83033ad9f6/NBKMENAOutlookKuwait20191218E.pdf

[9] https://www.ft.com/content/019cd3bc-6f44-3168-bb40-8f3c9173a6e0

[10] Ibid

[11] http://www.emiratesnbdresearch.com/plugins/Research/files/State%20of%20Kuwait%20update.pdf

[12] https://www.imf.org/en/News/Articles/2020/01/24/mcs012720-kuwait-staff-concluding-statement-of-the-2020-article-iv-mission [13] https://www.nbk.com/dam/jcr:d5a2237e-2273-4d83-9ec1-2d83033ad9f6/NBKMENAOutlookKuwait20191218E.pdf

[14] Ibid

[15]
Ibid

[16]
https://www.euromoney.com/article/b12kqlngs3c5j5/gcc-debt-attracts-asian-investors

[17]
IFN Country Report-Kuwait, January 2020

[18]
Ibid

[19]
https://www.imf.org/en/News/Articles/2020/01/24/mcs012720-kuwait-staff-concluding-statement-of-the-2020-article-iv-mission

[20]
https://aawsat.com/english/home/article/2094491/kuwait-1st-grilling-new-government

[21]
https://thearabweekly.com/kuwait-budget-forecasts-record-deficit
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