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Rating agency Fitch cuts outlook on Kuwait’s debt rating to ‘negative’ from ‘stable’

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Rating agency Fitch on Wednesday downgraded its outlook on Kuwait’s sovereign debt rating to “negative” from “stable”, warning of near-term liquidity risks associated with the state treasury fund.

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The agency, which affirmed Kuwait’s long-term rating at “AA,” said liquid assets in the General Reserve Fund (GRF) faced being depleted in the absence of parliamentary authorization for the government to borrow.

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Finance Minister Khalifa Hamada said in a statement that Kuwait’s financial position was solid, supported by the much larger Future Generations Fund -- only tapped into once, during the First Gulf War.

But he acknowledged the near-depletion of the GRF due to “structural imbalances” in public finances. He said boosting liquidity in the GRF was among the government’s top priorities and solutions were being explored.

An OPEC member state, Kuwait has been hit hard by lower oil prices and the COVID-19 pandemic.

Repeated rows and deadlocks between cabinets and successive elected assemblies have led to several government reshuffles and dissolutions of parliament, hampering much needed economic reforms.

“Without passage of a law permitting new debt issuance, the GRF could run out of liquidity in the coming months without further measures to replenish it” Fitch 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.”

Fitch said its base case, however, was that the government would replenish the GRF even without any new legislation, and that debt servicing of 400 million dinars ($1.32 billion), or 1 percent of GDP in 2021, would in any case continue in a timely manner.

It forecast Kuwait’s economy would stage a modest recovery this year as the dual shocks of oil output cuts and the pandemic fade after the economy contracted an estimated 7 percent in 2020.

Kuwait Projects Co (KIPCO), the country’s largest listed investment company, lost its last investment-grade rating on Monday when Moody’s downgraded it to Ba1 from Baa3 -- a sign low oil prices are affecting corporations as well.

Moody’s cut KIPCO’s ratings mainly due its view that cash burn would continue for 12-18 months, a substantial increase in market value leverage and unclear timing on a full turnaround of media company Orbit Showtime Network (OSN).

JPMorgan analysts said KIPCO would likely raise debt as the current pace of cash burn likely meant liquidity would not be sufficient to meet 2023 repayments without new financing.