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Kuwait lagging behind GCC peers on fiscal reforms, says Fitch
August 13, 2016, 1:11 pm

Kuwait's new budget indicates smaller fiscal consolidation than in many of its regional peers due to its healthy financial situation, according to Fitch Ratings.

The ratings agency said this reflects the government's exceptionally strong fiscal position, but also the difficulty of pursuing structural reforms, and the government's efforts to catch up with its domestic infrastructure investment plan.

The budget for fiscal year ending March 2017 implies a budget deficit excluding oil income and financial investment flows of 69 percent of non-oil GDP, compared to 87 percent of non-oil GDP in 2015.

Fitch said this adjustment of around 18 percent of non-oil GDP over two years, half of which has been automatic as falling oil prices have lowered subsidy expenditure, is smaller than in Abu Dhabi and Saudi Arabia but larger than Qatar.

The agency said Kuwait, rated AA with a stable outlook, has ample fiscal space which reduces pressure to make rapid fiscal adjustments. Sovereign net foreign assets are the largest of any Fitch-rated sovereign and debt/GDP is among the lowest, it added.

The Reserve Fund for Future Generations (RFFG) has estimated assets of more than 300% of GDP. Fitch forecasts the value of the General Reserve Fund (GRF) to fall to 98 percent of GDP in 2017 from 103 percent in 2016.

Fitch said subsidy reform in Kuwait has lagged behind other highly rated GCC countries, with reforms like the fuel price rises approved on August 1 by Kuwait's cabinet already enacted in the UAE, Saudi Arabia, and Qatar.

"This highlights the difficulties the government faces in building political consensus on reform. Attempts to raise diesel and kerosene prices in January 2015 were partly rolled back due to parliamentary opposition. The utility price rises approved in April will only come into effect in September 2017 and will only apply to non-Kuwaitis," Fitch said.

Overall expenditure is budgeted to rise by 3.5 percent in 2017 but Fitch forecasts a 6.8 percent increase, based on stronger-than-budgeted wage growth and better execution of capital spending than last year.

The agency said wage restraint is likely to prove challenging, as demonstrated in April when oil refinery workers went on strike against public-sector wage reform.

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