Moody's Investors Service has downgraded Kuwait's long-term issuer outlook, citing the absence of permission to withdraw assets from its sovereign wealth fund as a reason behind the decision.
The ratings agency downgraded the long-term foreign and local currency issuer rating for Kuwait to A1 from Aa2 and also changed the outlook for the country to stable to reflect "both the increase in government liquidity risks and a weaker assessment of Kuwait's institutions and governance strength," a ratings decision said Tuesday.
The country's available liquid resources are nearing depletion, and Kuwait does not have legal authorization to issue debt or to access assets held in the Future Generations Fund, Kuwait City. The fund is one of two run by the Kuwait Investment Authority, Kuwait City, which manages a total of about $550 billion in assets. The majority is run in the Future Generation Fund, with the remainder in the General Reserve Fund, which Moody's said is likely to be depleted before the end of the March 2021.
Moody's said there is a "deadlock over the government's medium-term funding strategy" and an "absence of any meaningful fiscal consolidation measures."
Kuwait's parliament passed legislation last month that removed a mandatory transfer of 10% of government revenues to the Future Generation Fund and reversed last year's transfer, although these moves have "only extended the point of depletion," Moody's said.
Government liquidity risk could be eliminated by securing predictable access to the sovereign assets, the agency added. "While the mandatory budget transfer to the FGF has been suspended, the government has not given any indication nor made any formal request to parliament to access FGF assets or income. Should the request come through, it would be politically contentious and likely take a long time and multiple versions to secure legislative passage. In the meantime, government liquidity risks will remain elevated," Moody's said.
The ratings agency added that evidence of a sustained improvement in the strength of Kuwait's governance and institutions could lead to a higher rating.