Kuwait transfers assets to heritage fund to release liquidity | Oil and Gas News
The government of Kuwait transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash to fill its budget deficit, after a political dispute over borrowing left one of the richest countries in the world to short of cash and prompted Fitch to reduce its outlook to negative.
Fitch confirmed Kuwait’s AA rating, but said “the impending depletion of liquid assets” and “the lack of parliamentary authorization for the government to borrow” created uncertainty. Its report follows a recent warning from S&P Global Ratings that it would consider downgrading Kuwait within the next six to 12 months if politicians fail to break the deadlock.
Despite being a high-income country, years of falling oil prices have forced Kuwait to deplete its reserves. Desperate to generate cash, the government last year began swapping its best assets for cash with the $ 600 billion Fund for Future Generations, which aims to protect the wealth of the Gulf Arab nation for a time. after oil. Now that these have disappeared, it is unclear how the government will cover its eighth consecutive budget deficit, projected at 12 billion dinars for the fiscal year starting in April.
The assets include stakes in Kuwait Finance House and telecommunications company Zain, a person familiar with the matter said, asking not to be named as the information is private. State-owned Kuwait Petroleum Corp., with a face value of 2.5 billion dinars ($ 8.3 billion), was also transferred from the treasury in January, the person said.
The finance ministry declined to give details of the exchanges. Responding to Fitch, however, Finance Minister Khalifa Hamada said Kuwait’s financial situation remained “strong” due to the cushion provided by the FGF. The government’s priority going forward would be to replenish the cash flow, he said, without specifying how.
“It’s a very immediate crisis now, not a long-term crisis like it used to be,” said Nawaf Alabduljader, professor of business management at Kuwait University. “The Fund for Future Generations is our life jacket, but we don’t have a boat to take us ashore, we have no vision. We need to restructure our economy and move away from the welfare state. “
Like its neighbors, Kuwait is facing the double pressure of Covid-19 and falling oil prices. Unlike Saudi Arabia and others, however, Kuwaiti lawmakers have blocked proposals for borrowing in international markets to cover the budget deficit. Kuwait has not returned to the market since its first Eurobond issue in 2017.
Although nearly three-quarters of the budget goes to salaries and public sector subsidies, parliamentarians also opposed any spending cuts, saying the government must reduce waste and corruption before shifting the burden to the government. public or resort to debt.
The FGF, meanwhile, cannot be reached without legislation, and the idea of tapping into the national pot is deeply unpopular. Parliament passed a law last year exempting the government from transferring the usual 10% of revenue to the FGF during deficit years.
The swaps gave the government a few months to pass its borrowing law. In the event of failure, it could still contract a loan from the FGF or a debt plan could be issued by decree, although both scenarios are unlikely for the moment.
“They just buy time,” said Jassim Al-Saadoun, director of Al-Shall Economic Consultants.
With 80% of government revenues based on oil, Kuwait needs $ 90 crude to balance the new budget. But the benchmark Brent was trading around $ 58 a barrel on Wednesday, with spending expected to rise 7%.
Parliament’s finance committee resumed consideration of the borrowing bill on Tuesday, sparking expectations of a thaw, but the trend on the brink has prompted warnings that repeated delays could lead to long-term costs .
Kuwait would consider “either imposing high taxes,” said Talal Fahad Alghanim, former CEO of Boursa Kuwait. “Or, if the government fails to convince parliament, the central bank will have to resort to devaluation of the dinar.”