Fitch cuts outlook on Kuwait's debt rating to 'negative'

Rating agency Fitch said on Wednesday it downgraded the outlook on Kuwait's sovereign debt rating to "negative" from "stable", saying it saw near-term liquidity risks associated with the state treasury fund.

The rating agency, which affirmed Kuwait's long-term rating at "AA", said the outlook change reflects near-term liquidity risk associated with the imminent depletion of liquid assets in the General Reserve Fund (GRF) in the absence of parliamentary authorisation for the government to borrow.

An OPEC member state, Kuwait has been hit hard by lower oil prices and the coronavirus 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."

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

Fitch said Kuwait's economy will stage a mild economic recovery this year as the dual shocks of oil production cuts and the pandemic begin to fade after the economy contracted by an estimated 7% 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 that the impact of low oil prices on the sovereign are affecting corporations as well.

In a note published on Wednesday, JPMorgan said Moody's maintenance of an investment-grade rating for KIPCO had been "baffling".

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).

"This consistent cash burn, combined with the investment company's concentrated portfolio of somewhat mediocre assets, did not seem to justify an IG rating, irrespective of supportive shareholders," JPMorgan said.

It added KIPCO would likely raise debt as the current pace of cash burn likely means liquidity would not be sufficient to meet 2023 repayments without new financing.