The COVID-19 crisis that devastated the lives and livelihood of people and played havoc on economies both big and small across the world, has also taken a heavy human and economic toll on Kuwait. Since the first infections were reported in the country in late February 2020, the authorities have exerted their best efforts to contain, control and mitigate the impact of the virus on people and the economy of the country.
With uncharacteristic alacrity, the government responded promptly to the emergence of the virus in the country by introducing several precautionary and preventive measures. Some of these broad-based early steps included halting international flights, shutting down operations at air- and sea-ports, sealing land borders, suspending business activities, closing educational institutions, banning public gatherings, and imposing a stringent 24-hour curfew.
Though some would argue that several of these steps were excessive and did more harm than good, Kuwait has persisted with variants of these measures for what is arguably one of the longest and continuous stretches of restrictions in the world. For instance, educational institutions that were closed immediately after the first cases were reported on 24 February 2020, have for the most part remained closed for more than a year now. This has severely jeopardized learning and education, as well as the future of nearly 750,000 students who are enrolled in schools, colleges and other educational institutions across the country.
Lockdowns, curfews, and other precautionary and preventive measures against the spread of infections have also sharply reduced or restricted mobility and interactions among people, significantly curbed business activities, curtailed private spending, deterred investment activity and impacted the overall GDP of the country from the beginning of the second-quarter of 2020. Real GDP, which in the first-quarter (1Q) of 2020 posted a modest decline of 1.1 percent, is now estimated to have contracted by 7.9 percent over the whole of 2020.
Protracted preventive and protective measures in place, as well as the relatively meager fiscal mitigation support provided by the government have led to non-oil growth, which contracted by 3.5 percent in 1Q, declining even further
during the remaining three quarters of the year. Meanwhile, real oil GDP that increased by 1.2 percent on the back of the OPEC+ deal lapse in 1Q of 2020, contracted substantially during the rest of 2020 due to lower international oil prices and the need to comply with production cuts mandated by OPEC+ agreement.
In its economic update for Kuwait in the fourth-quarter of 2020, the World Bank noted that economic growth in the country, which had been tapering since the precipitous fall in oil-prices in mid-2014, exacerbated in 2020 from the twin shocks of COVID-19 crisis and oil-price slump. Lack of much-needed economic and financial reforms and inability of the government to pass a debt law that has been held up in parliament since October 2017, have stymied the efforts by authorities to alleviate pressure on the country’s fiscal buffers, which have depleted rapidly during the past year due to declining oil revenues and unexpected additional spending on mitigating the coronavirus health crisis.
For its part, the International Monetary Fund (IMF) has noted that while it is true that Kuwait’s large financial buffers give it leeway to tackle the economic and financial challenges confronting it from a position of strength, that window is fast narrowing. To move forward, Kuwait urgently needs to introduce and implement critical economic, financial and administrative reforms, said the Fund.
Lingering nature of the pandemic, prolonged preventive measures, lax government response and support to the economic downturn and fallouts from the crisis, and persistent political impasse have resulted in global rating agencies downgrading Kuwait’s sovereign ratings. In mid-July of 2020, international rating agency, Standard & Poor’s (S&P) Global Ratings downgraded Kuwait’s sovereign credit rating outlook to negative from stable. While confirming Kuwait’s debt rating at AA-, the agency noted that the main reason behind the audit risks was from the continued depletion of the General Revenue Fund (GRF), the main reserve of government financial liquidity, in the absence of the authorities adopting alternative financing strategies.
“We forecast that Kuwait’s central government deficit will total a substantial 30 percent of GDP in the 2020-2021 fiscal year, while the government’s main source of budget funding, the General Reserve Fund (GRF), is approaching depletion. Beyond this immediate fiscal impasse, broader reform momentum remains slow and is complicated by the confrontational relationship between the government and parliament,” said the agency while making its assessment in 2020. Nearly a year on from the views expressed by S&P, nothing much appears to have changed in the country’s economic and political impasse.
Moody’s Investors Service, another leading global rating agency announced in September 2020 that it too was downgrading Kuwait’s long-term foreign and local currency issuer rating to A1 from Aa2, and changing its outlook on the country to stable. The downgrade reflects both the increase in government liquidity risks and a weaker assessment of Kuwait’s institutions and governance strength, said the agency.
Moody’s added that in the continued absence of legal authorization to issue debt or draw on the sovereign wealth fund assets held in the Future Generations Fund (FGF), available liquid resources are nearing depletion, introducing liquidity risk despite Kuwait’s extraordinary fiscal strength. While the fractious relationship between parliament and the executive has been a long-standing constraint on Moody’s assessment of institutional strength, the agency noted that the present deadlock over the government’s medium-term funding strategy and the absence of any meaningful fiscal consolidation measures point to more significant deficiencies in Kuwait’s legislative and executive institutions and policy effectiveness than previously assessed.
And, in February 2021, Fitch Ratings, the last of the big-three global rating agencies that includes Moody’s and S&P, also decided to follow the other two and revise its outlook on Kuwait’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘AA’. The revision in its assessment reflects near-term liquidity risk associated with the imminent depletion of liquid assets in the General Reserve Fund (GRF) in the absence of parliamentary authorisation for the government to borrow. This risk is rooted in political and institutional gridlock that also explains the lack of meaningful reforms to tackle double-digit fiscal deficits and the expected weakening of Kuwait’s fiscal and external balance sheets, said the agency.
Noting that without passage of a law permitting new debt issuance, the GRF could run out of liquidity in the coming months unless further measures were initiated to replenish it, the agency said, depletion of GRF liquidity would sharply limit the government’s ability to make good on its spending obligations and could result in significant economic disruption. The rating agency added that it expects fiscal deficits to remain in the double digits in the medium to long term, which could lead to a gradual but steady deterioration of Kuwait’s balance sheet strengths, barring significant fiscal reforms or a rebound in global oil demand.
The fact that three of the world’s biggest rating agencies downgraded Kuwait’s ratings in less than a year speaks to the ongoing shortcomings in the economic and political fronts. In general, credit ratings from top rating agencies are used by sovereign wealth funds, pension funds, and other international investors to measure the creditworthiness of a country and therefore it has a significant impact on borrowing costs in the country. The downgrade by the agencies could impact Kuwait’s ability to borrow on easier terms, if and when the executive and legislative reach a consensus and agree to pass the contentious public debt law.
Since the public debt law lapsed in October 2017 the government has been trying in vain to pass a new debt law through the country’s strong and often rambunctious parliament. Currently Kuwait has no legal framework to deficit-spend beyond its current limit of KD10 billion. The long-pending debt bill would allow Kuwait to borrow up to KD20 billion over an extended period, but support for the bill remains a thorny issue with many among the public and opposition groups in parliament.
High-profile corruption scandals that have regularly surfaced in the recent past have led to a public perception that government corruption and mismanagement is growing alongside Kuwait’s liquidity crisis, and providing the authorities with even more funds is not the solution. Passage of the debt law, deficit reduction and fiscal reform are crucial economic measures that the government needs to initiate in order to revive and revitalize the economy. However, all these measures are also beset by entrenched political divisions and fiscal rigidities.
Over 70 percent of government spending consists of salaries and subsidies and about 80 percent of Kuwaiti nationals are employed in the bloated public sector. The high wage bill and continued employment of nationals in the public sector workforce have been a drain on resources on the government’s annual budget for years. However, thinking about reforming, let alone implementing changes to these two elements, is a red-line drawn by lawmakers and is an area that the government is keen not to focus on.
While the authorities do have some flexibility to take extraordinary measures to sustain funding measures, it has so far avoided initiating any such steps for fear of further antagonizing parliament. Fortunately, both the legislative and executive have so far shown restraint in their confrontations and have even cooperated to avoid an immediate liquidity crisis. In August 2020, parliament passed legislation removing the automatic requirement to automatically transfer 10 percent of revenue each year from the GRF into the much larger Future Generations Fund (FGF). Lawmakers have also allowed the GRF to transfer its liquid assets to FGF giving the government some wiggle room in its economic space.
Analysts note that the GRF still has a broad range of illiquid assets that could also be transferred to the FGF to quench its immediate liquidity crunch, including the transfer of the mega Kuwait Petroleum Corporation (KPC) — the parent company for all of Kuwait’s up- and down-stream hydrocarbon subsidiaries. But the government has said that the transfer or sale of KPC is presently not under consideration.
Another choice before the authorities is for the GRF to borrow from the FGF, as it did during the Iraqi invasion in 1990-1991. But this would require aquience from parliament, which is unlikely under the present political circumstances. A third option, which would again be politically very contentious, is for His Highness the Amir to issue decrees with the force of law, which is permitted under Kuwait’s constitution, for a new public debt law. But, so far, the government has chosen not to go down that route.
The ongoing COVID-19 crisis has put pressure on all stakeholders involved — the executive, the legislative, and ordinary citizens — to realize and recognize that without enacting much-needed reforms, even if some of them are unsavory and seem unacceptable in the short-term, the country’s future is indeed bleak.
– Staff Report