As per an estimate from the International Monetary Fund, Kuwait will require $180 billion in financing over the next six years given a scenario of low oil prices and its “modest” fiscal measures.
Earlier this month, Kuwait had said it expects a budget deficit of $30.31 billion (9.2 billion dinars) in the fiscal year starting on April 1; the deficit marks an increase of 19% compared to the previous year.
“Subdued oil prices and output are weighing on near-term growth prospects and external and fiscal balances,” said Washington-based IMF in a statement describing its preliminary findings following an official visit to the country. “The recent run-up in spending has worsened the fiscal position and eroded liquid buffers. Without a course correction, the fiscal and financing challenges would intensify and the window of opportunity to proceed at a measured pace would narrow.”
Incidentally, in 2014-2015, when oil prices tanked, Kuwait’s economy, a major oil producer, was among the most resilient in the region; much of this can be traced to low debt and large financial assets.
Kuwait has not tapped the global debt market since its debut $8 billion debt sale in 2017 since its parliament is yet to pass a law allows it to raise its debt ceiling and to issue debt with longer maturities.
This has raised concerns among analysts that its wealth fund General Reserve Fund (GRF), managed by the Kuwait Investment Authority (KIA), might be depleted over the next few years to cover Kuwait’s deficits.
According to IMF’s estimates, Kuwait’s consolidated fiscal balance is set to turn from a 5.5% of gross domestic product surplus in 2019 to a deficit of a similar magnitude in 2025; this will require an additional financial requirement of some $180 billion over the next six years.
As per IMF’s estimates, KIA’s assets surpassed 410% of its GDP by the end of 2019, as one of its funds continued to receive mandatory transfers from the government and created strong returns on its assets.
“However, the continued drawdown from the GRF for fiscal financing reduced its estimated total and liquid balances to 56 and 24 percent of GDP by June 2019,” said the IMF while adding it expected GRF’s “readily available” assets to be exhausted in less than two years, without recourse to other funding sources.
“Borrowing would help reduce drawdowns from the GRF allowing it to last longer,” said the IMF. “Assuming no legal restriction on borrowing, to finance the remaining gap, government debt would have to rise to over 70 percent of GDP in 2025 from 15 percent in 2019” — borrowing activities that the fund said would be unprecedented.”
Although kuwait’s non-oil economy has increased its footprint during 2019 low oil prices along with production custs have weighed on its oil sector, resulting in overall economic growth of about 0.7% in 2019, down from a 1.2% growth in 2018, said the IMF.
It expects Kuwait’s growth to stabilize to an annual rate of 2.7% from 2021 to 2025, after growth of 1.5% this year, basing its estimates on the assumption that oil prices would decline from $62 per barrel in 2019 to about $56 per barrel in 2023.
Kuwait’s 2020-2021 budget assumes an oil price of $55 a barrel.