Supervisor Elham AbolFateh
Editor in Chief Mohamed Wadie

Moody’s Downgrades Kuwait Outlook over Liquidity Risks


Thu 24 Sep 2020 | 12:57 AM
Taarek Refaat

Moody's rating agency downgraded Kuwait for the first time due to an increase in the government's liquidity risk.

Kuwait's sovereign credit rating has been downgraded by two levels to A1, the fifth highest investment level on par with China and Saudi Arabia. The agency also revised the outlook to stable, completing the review for downgrade started in March.

“In the absence of a legal mandate to issue debt or draw down from sovereign wealth fund assets held in the FGF, the available liquid resources are close to depleting, leading to liquidity risk despite Kuwait's extraordinary financial strength,” Moody's said.

Moody's downrated Kuwait two levels below Fitch and one below Standard & Poor's (S&P), which lowered the country's outlook for the first time in March.

In addition, Kuwaiti dollar bonds also declined as the yield on $3.5 billion securities, due in 2022, rose 14 basis points to 1.08%, the highest since June.

Meantime, Kuwaiti government’s needs to issue 27.6 billion dinars to meet funding requirements between the current fiscal year and the fiscal year ending March 2024.

In the absence of a new public debt law, the government has been unable to borrow since the first Eurobond was issued in 2017, forcing it to rely on the General Reserve Fund instead and liquid assets there are on the verge of depletion, forced the government to take other measures to meet spending needs.

This month, the Kuwaiti parliament approved the state budget for the current fiscal year, expecting a deficit of 14 billion dinars after taking into account low oil prices and a cut in public expenditures,  leveraging the Future Generations Fund (FGF), which is designed as a buffer for when Kuwait is running out of oil.

Recently, the government has been looking for approval from parliament to borrow as much as 20 billion dinars, yet, the finance and economic committee has proposed reducing the limit in half.

Moody's: Funding Situation Threatens Government to Function

Moody's said: "The persisting deadlock addressing the funding situation now directly threatens the ability of the government to function, representing a significant escalation in the brinksmanship between the two branches of government."

Measures taken by lawmakers so far, including the abolition of the mandatory annual transfer of 10% of government revenues to the FGF, "only extended the burn point" through December 2020.

According to Moody's, a debt ceiling of 20 billion dinars will be reached in the Kuwait bill in less than two years.