Moody’s Investors Service estimated that the combined value of Kuwait’s sovereign wealth fund (SWF) assets has continued to rise since the oil price shock
The Future Generations Fund (FGF), one of two funds managed by the Kuwait Investment Authority (KIA), which gets at least 10 per cent of government revenues in line with the legal framework and strong profitability, has risen the size of the FGF to an estimated 309 per cent of GDP, according to Moody’s study.
Moody’s expects FGF will continue to develop as long as the fund remains lucrative and the mandatory transfer stays in place.
By comparison, since the fiscal year 2015/16, the state has taken on its second fund, the General Reserve Fund (GRF), to finance deficits caused by the oil price shock. Kuwait’s fiscal deficit peaked at 17.5 per cent of GDP in 2016/17, an enormous decrease from a 20 per cent surplus in 2013/14, the study revealed.
The rating agency added that in the early years of the shock, the government tried to relieve stress on the GRF by issuing national and foreign debt. However, parliament blocked the government’s attempts to increase the debt ceiling to US$82bn and lengthen tenors up to 30 years in 2017 (from US$32bn and 10 years, respectively).
As a result, the debt law expired and the government was forced to finance deficits and mature GRF national borrowing, resulting in an accelerated drawdown of its assets to an estimated US$75.9bn as of March 2019.
Moody’s further added that the depletion of the GRF would depend on if and when parliament passed another debt law, but it will need to finance deficits around nine per cent of GDP over the next few years. However, as only around 65 per cent of GRF assets are liquid, the fund would only be able to finance around three years worth of deficits. As a result, without a new debt law in place, the liquid portion of GRF assets could be depleted by the end of fiscal year 2021/22.
The eventual depletion of the GRF could have several implications for sovereign creditworthiness. Under the agency baseline scenario, which assumes parliament approves the debt law by 2020 and FGF assets remain ring-fenced, a depleted GRF implies that the government will rely much more on debt issuance for funding.
Combined with large fiscal deficits, this could lead to a rapid increase in general
government debt and an increase in debt-servicing costs from the budget. Although unlikely, a situation where the GRF is depleted before no alternative funding sources have been arranged would be very credit negative, Moody’s noted that such a scenario would require the government to make significant cuts to spending, the agency expectations for persistent fiscal deficits.
If the government is unable to pass the debt law before it depletes the liquid portion of GRF assets, Moody’s stated that the government will either have to amend the legislation surrounding the use of the FGF or implement significant spending and revenue measures to reduce its gross financing requirements.
