CBK launches real-time stress test to gauge banks’ capacity for sovereign debt financing
The Central Bank of Kuwait has initiated a real-time stress test—rather than a hypothetical one—to assess local banks’ capacity to finance upcoming sovereign debt issuances under the 30 billion dinars Financing and Liquidity Law.
Discussions with bank officials revealed that a comfortable space of 2.5-3 billion dinars is available for sovereign lending without jeopardizing other economic sectors, reports Al-Rai quoting a CBK source.
Although bank liquidity appears strong — totaling 12.7 billion dinars in bonds, securitizations, and central bank current accounts — this full amount isn’t directly available for lending due to regulatory maturity requirements and capital efficiency constraints.
Each bank’s ability to participate depends on its capital adequacy, future financing plans, and capacity to absorb temporary liquidity gaps, a common occurrence in credit-expanding economies. Importantly, Kuwaiti banks maintain strong liquidity, profitability, capital reserves, and deposit bases.
Sovereign debt will be issued gradually and diversified across local and international markets, not in a single tranche, mitigating pressure on local banks.
Moreover, Kuwait’s very low sovereign risk (zero capital cost) enhances its appeal for public debt investments.
To bolster funding capacity for public debt and future development projects (like real estate financing), banks are exploring tools such as:
- Syndicated external loans
- Increased deposit attraction
- Foreign currency conversion into dinars
- Tier 1 capital bonds and sukuks
- Central Bank liquidity via repo operations
- Activation of the discount window to recycle long-term debt
The strategy anticipates a credit expansion phase, aiming for long-term, unconventional financing terms to support mega projects while ensuring financial solvency and regulatory compliance.
The IMF estimates Kuwait’s current debt-to-GDP at 7%, one of the lowest globally, with projections to reach 25% by 2029—highlighting ample fiscal space to launch this sovereign debt plan responsibly.
