Why Is Wealthy Kuwait Opting To Borrow KWD 30 Billion?
KUWAIT CITY, March 18: The Cabinet's approval of a draft Financing and Liquidity Law, valued at KWD 30 billion over 50 years, has ignited widespread discussion among economists and investors. The move marks Kuwait's return to international debt markets for the first time in eight years, shifting away from reliance on its general reserves for financing. This raises the question: Why is wealthy Kuwait, with its vast reserves, opting to borrow?
Kuwait is widely recognized as a financially robust nation, backed by future generations' reserves exceeding $1 trillion, according to international institutions monitoring sovereign wealth funds. Additionally, specialized studies indicate that Kuwait's oil revenues are sufficient to sustain the country for approximately 100 years. Given this context, the decision to borrow has puzzled many.
Rating agencies have consistently highlighted Kuwait's strong financial position, citing its economic strength, substantial financial wealth, and minimal debt levels. However, sovereign borrowing does not inherently signal financial weakness. In Kuwait's case, the issue lies in insufficient liquidity reserves to finance anticipated development projects and cover the recorded financial deficit. Importantly, the expected cost of sovereign borrowing is lower than the returns on sovereign assets, making public debt a strategic financial tool rather than a luxury.
The Rationale Behind Public Debt
Public debt is a common and often beneficial practice in both developed and emerging economies. For instance, Japan, the world's third-largest economy, carries a debt exceeding $8.4 trillion—more than double the size of its economy. The key to evaluating public debt lies in its productivity: the more it fuels development, the greater its benefits and the lower its costs.
In Kuwait's case, the government has emphasized that borrowed funds will be directed toward capital projects in partnership with the private sector, reflecting a commitment to financial balance, economic reform, and administrative efficiency. This approach aligns with the government's broader goals of achieving sustainable development and enhancing infrastructure.
Key Benefits of the Financing and Liquidity Law
1. Credit Flexibility: The law is expected to enhance Kuwait's sovereign credit rating, providing resilience against oil price fluctuations and the long-term transition away from oil dependency.
2. Investor Confidence: It will bolster confidence among local and international investors and creditors, fostering a more robust debt market.
3. Development of Debt Markets: The law will help the private sector build a yield curve, serving as a benchmark for pricing financial assets.
4. Economic Protection: By ensuring that public borrowing does not lead to long-term financial issues, the law safeguards the national economy from shocks and speculation.
5. Cost Efficiency: The cost of sovereign borrowing is expected to be lower than the returns on sovereign assets, making it a financially prudent move.
6. Liquidity Regulation: The law will help regulate liquidity levels, localize savings, and enhance the government's ability to meet future financing obligations.
A Shift from Past Borrowing Practices
This move contrasts sharply with Kuwait's borrowing during the 2016-2017 fiscal year, when approximately $8 billion was raised through international sovereign bonds, primarily to cover budget deficits resulting from non-developmental spending. The new law, however, focuses on consolidating local development and advancing infrastructure projects, thereby boosting Kuwait's economic competitiveness.
Kuwait's Strong Financial Position
Kuwait's low sovereign debt levels further strengthen the case for this law. According to Moody's, Kuwait's debt represents less than 3% of its GDP as of the 2023-2024 fiscal year, among the lowest rates globally. The agency projects a budget deficit of 4-7% of GDP during the fiscal years 2024-2027.
Kuwait's strong financial buffers, supported by its economic strength and significant financial wealth, position it favorably to secure sovereign loans at competitive interest rates. This move also alleviates pressure on the General Reserve Fund, which was nearing depletion in recent years.
Phased Implementation and Strategic Borrowing
Official sources indicate that the lending capacity provided by the Financing and Liquidity Fund will be utilized in phases, with borrowing distributed between local and international markets. This approach ensures optimal liquidity levels and favorable interest rates. The size of debt issuance will be determined by the state's financing needs, influenced by economic activity and growth trends.
The adoption of the Financing and Liquidity Law represents a necessary reform for Kuwait, driven by the need to secure funding for capital expenditures and development projects. By leveraging public debt strategically, Kuwait aims to achieve sustainable growth, enhance infrastructure, and protect its economy from future shocks. This step underscores the government's commitment to financial reform and long-term economic stability.
Key Gains of Public Debt:
1. Increased flexibility of sovereign credit ratings.
2. Enhanced investor and creditor confidence.
3. Development of debt markets and a reference yield curve for the private sector.
4. Implementation of public borrowing without long-term financial risks.
5. Lower expected costs of sovereign borrowing compared to returns on sovereign assets.
6. Protection of the national economy from financial shocks and speculation.
7. Strengthened government ability to meet future obligations with various buffers.
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