Standard & Poor’s (S&P) has cut Kuwait’s credit rating from AA- to A+ and given it a negative outlook, as evidence piles up over the country’s increasingly troubled fiscal position – despite having huge savings.
It is the latest in a series of backward steps for the country’s credit profile over the past year. In September 2020, Moody’s downgraded its rating on the country to A1 from Aa2. In February this year, Fitch Ratings changed the outlook for its rating on Kuwait to negative while affirming it at AA; it was the first change Fitch had made to the rating since September 2008.
In its latest move, S&P pointed to the huge budget deficits the government has been running and the fact that the executive has found it impossible to persuade the National Assembly (parliament) to pass legislation allowing it to issue more debt or give it easier access to the country’s substantial long-term savings, which amount to around $500 billion. The parliament is currently in recess until October.
In the fiscal year ending March 2021, the central government deficit reached an estimated 33% of gross domestic product (GDP) – higher than that of any other country S&P rates. Higher crude prices should improve the situation this year, as oil accounts for 90% of government revenue. Even so, S&P expects the deficit to average 17% of GDP over 2021-2024. Kuwait needs oil prices to rise to more than $90 a barrel before revenues will match spending commitments.
S&P noted the government “has yet to put in place a comprehensive funding strategy for these deficits”. The old debt law expired in 2017 and since then the government has failed to pass successor legislation, meaning it has been unable to borrow.
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To cover its revenue shortfalls, it has drawn on its savings in the General Reserve Fund, but this well is now starting to run dry – S&P says “we understand that the GRF has been substantially diminished.”
Access to the much larger Future Generations Fund (FGF) requires approval from parliament, but that has not been forthcoming, with the relationship between the executive and the opposition-dominated legislature increasingly poor.
“The pace of structural reforms in Kuwait also remains sluggish: the long-discussed adoption of new taxes and broad expenditure adjustments has largely stalled,” S&P added, noting that these delays could leave the country more vulnerable to future shocks.
S&P warned that, if Kuwait proves unable to find a way to resolve its financial challenges, it “could face a hard budgetary constraint requiring a rapid and sizable expenditure adjustment”.
The economy is making a slow recovery from a 9% contraction last year caused by the Covid-19 pandemic. S&P projects economic growth of just 0.5% this year, although it says the pace should pick up in the following years.