In a first, rating agency Moody’s Investors Service has downgraded Kuwait due to the rise in the government’s “liquidity risks.” The sovereign credit rating was cut two levels to A1, the fifth-highest investment-grade level and on par with China and Saudi Arabia, reported Bloomberg citing a Moody's statement.
Moody's also cited weaker governance and institutional strength for the downward spiral of ratings. "In the continued absence of legal authorisation to issue debt or draw on the sovereign wealth fund assets held in the Future Generations Fund, available liquid resources are nearing depletion, introducing liquidity risk despite Kuwait's extraordinary fiscal strength," the rating agency said.
Moody’s now ranks Kuwait two steps lower than Fitch Ratings and one below S&P Global Ratings, which lowered its own assessment of the country in March for the first time ever.
The downgrade assumes significance as the Gulf state, battered by low oil prices, struggles to pass a law allowing it to issue international debt.
Moody’s projects that net sovereign issuance of up to 27.6 billion dinars ($90 billion) would be needed to meet the Kuwaiti government’s funding requirements between the current fiscal year and the fiscal year ending March 2024. The rating company revised the outlook to stable, completing the review for downgrade started in March.
According to various media reports, the nearly $140 billion economy is now facing a yawning deficit of $46 billion, caused by the coronavirus crisis, low oil prices, and a back and forth between government and parliament over a new debt law that is limiting its ability to boost state coffers. Lacking a new public debt law, the government has been unable to borrow since a debut Eurobond in 2017, forcing it to rely on the General Reserve Fund instead. Liquid assets there are close to being depleted, forcing the finance ministry to push through other measures to meet spending needs.
The government has been looking for approval from parliament to borrow as much as 20 billion dinars. In response, the finance and economic committee has proposed reducing the limit in half, an idea the Finance Ministry said it will study but then turned down.
“The persisting deadlock addressing the funding situation now directly threatens the ability of the government to function, representing a significant escalation in the brinkmanship between the two branches of government,” Moody’s said.
