The new Emir of Kuwait faces several near- and medium-term challenges, but the most acute short-term challenge for the Emir is to resolve the funding gap (AA-/Negative/A-1+), said S&P Global Ratings in a new report.
S&P noted that it does not expect any significant immediate change in Kuwait's broad policy direction following the passing of Emir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah on Sept. 29, 2020, following 14 years of rule. The succession process has been smooth, with the Crown Prince Sheikh Nawaf sworn in as the new Emir the next day.
The main fiscal liquidity fund, the General Reserve Fund (GRF), has been dwindling continually over recent years, as it has been the sole funding source for deficits at the central government level since the expiry of the debt law in October 2017.
The expiry of the debt law meant that Kuwait has been unable to borrow, while the authorities have so far been reluctant to draw on the much larger Future Generations Fund (FGF), which is primarily earmarked for a future time when the oil reserves run out.
Over the past two months, the authorities have implemented measures that could buy additional time, but these measures on their own remain insufficient to resolve the funding gap. For example, parliament adopted a law suspending the automatic transfer of 10% of government revenues to the FGF, making it conditional on the budgetary outcome for a given year.
The authorities also injected liquidity to the GRF from the FGF in exchange for the transfer of other assets to the FGF. Even taking these measures into account, S&P estimates that Kuwait's funding needs for the 2020-2021 fiscal year remain substantial, at close to 24% of GDP.
Beyond the momentary pressures, Kuwait will have to grapple with a number of structural problems over the medium term, said S&P.
Even if the debt law is adopted imminently, the scale of the fiscal deficit we project through to 2022 implies that the proposed debt ceiling of KD20 billion ($65 billion) could be exhausted in about two years, and as such, the current problems will resurface.
A longer-term sustainable solution could lie in a more comprehensive fiscal adjustment, including cutting subsidies, closing spending loopholes, and introducing new taxes, which other GCC states have already done, the report said.
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