Moody’s, a credit rating agency, said in a recent report released yesterday that the vision is still unclear in Kuwait regarding government financing arrangements, which is the main driver for our recent decision to lower the sovereign rating to (A-), which makes it difficult to anticipate the potential impact.
The agency said that the Future Generations Reserve Fund, another savings tool that possesses the majority of government savings but is not available to finance the general budget, noting that in light of the depletion of most of the assets of the General Reserve Fund, the agency expects that the General Investment Authority will authorize the General Reserve Fund to sell additional shares of Its shrinking array of illiquid assets to the Future Generations Fund.
Moody’s estimates that these assets are worth a maximum of $ 15 billion to cover budget expenditures, which will cover about less than half of the projected financing requirements for the next fiscal year.
As such, we expect the government to take additional measures to avoid the financing crisis, which could include passing a long-awaited debt law or amending the existing legal framework to allow a transfer of a portion of investment income from the Future Generations Fund to the General Reserve Fund.
We estimate that the liquid portion of the assets in the General Reserve Fund – the smaller stabilization fund – has been largely depleted, but some additional liquidity can be provided by selling the remaining share of illiquid assets – which we estimate at 12% of GDP as in February 2021. For the Future Generations Fund.
If the law is amended to allow access to the assets of the aforementioned fund for budgetary purposes, the overall level of the assets of the sovereign wealth fund will decrease in the medium term in the absence of a new debt law.
Otherwise, the agency said that if the government passes a new debt law but maintains the current legislative framework for the Future Generations Fund, the level of assets of the sovereign wealth fund is likely to rise, but the debt will rise very sharply.
A compromise whereby a portion of FGF investment income is transferred to the budget in conjunction with a new debt law could preserve the assets of the SWF and slow down debt accumulation, but it will not eliminate it.
We estimate that the volume of sovereign assets held in the FGF is very large, at 391% of GDP.