One of the World’s Richest Petrostates is Running Out of Cash
(Bloomberg) -- When Kuwait’s then-Finance Minister Anas Al-Saleh warned in 2016 that it was time to cut spending and prepare for life after oil, he was ridiculed by a population raised on a seemingly endless flow of petrodollars. Four years on, one of the world’s richest countries is struggling to make ends meet as a sharp decline in energy prices raises profound questions over how Gulf Arab states are run.
Al-Saleh’s long gone, shifting to other cabinet positions. A successor, Mariam Al-Aqeel, moved on in January, two weeks after suggesting Kuwait restructure a public-sector wage bill that’s the single biggest drag on state finances. Her replacement, Barak Al-Sheetan, warned last month there wasn’t enough to cash to pay state salaries beyond October.
Slow to adjust big-spending habits as oil revenues fall, the Gulf states are hurtling toward a moment of economic reckoning, prompting renewed debate over the future of nations that for decades bought popular loyalty with state largesse.
“We’re going to wake up one day and realize we went through all our savings, not because we didn’t check our bank statement but because we looked at it and said, it’s probably a bank glitch, and then bought the latest Rolex,” said Fawaz Al-Sirri, who heads Bensirri political and financial communications firm.
The OPEC club of oil-exporters has revived crude from its historic drop this year, but $40 is still too low. The coronavirus pandemic and shift toward renewable energy threaten to keep prices depressed.
Saudi Arabia is curbing benefits and imposing taxes. Bahrain and Oman, where reserves are less plentiful, are borrowing and seeking support from wealthier neighbors. The UAE diversified with the rise of Dubai as a logistics and finance hub.
In Kuwait, however, a standoff between the elected parliament and a government whose prime minister is appointed by the emir has led to policy gridlock. Lawmakers have thwarted plans to reallocate state handouts and blocked proposals to issue debt.
Instead, the government has almost exhausted its liquid assets, leaving it unable to cover a budget deficit expected to reach the equivalent of almost $46 billion this year.
It’s been a gradual decline for Kuwait, which in the 1970s was among the most dynamic Gulf states, with its outspoken parliament, entrepreneurial heritage and educated people.
Then the 1982 crash of an informal stock market shook Kuwait’s economy and coincided with instability from the near decade-long Iran-Iraq war. Kuwait embarked on a spending spree to rebuild after Saddam Hussein’s assault led to the 1991 Gulf War. It took years for oil to flow freely again.
Kuwait still relies on hydrocarbons for 90% of its income. The state employs 80% of working Kuwaitis, who out-earn private-sector counterparts. Benefits for housing, fuel and food can total $2,000 a month for an average family. Salaries and subsidies soak up three-quarters of spending by the state, which is heading for its seventh consecutive deficit since the 2014 oil slump.
Savings for Life
But Kuwait has money, plenty of it, stashed away in an unbreakable fund -- the world’s fourth-largest at an estimated $550 billion. Touching the Future Generations Fund, designed to ensure prosperity after oil runs out, is a controversial proposition.
Some Kuwaitis say the time has arrived. Opponents warn that without diversifying the economy and creating jobs, the savings would run out in 15-20 years.
“It’s not a solvency problem, although it’s considered a cash drought,” said Jassim Al-Saadoun, head of Kuwait-based Al-Shall Economic Consultants.
Rich for Infinity
The wealth fund has already come to the rescue, purchasing over $7 billion of assets from the Treasury in recent weeks. Parliament approved plans to halt, in years of deficit, an annual transfer of 10% of oil revenues to the fund, freeing up another $12 billion, but not enough to cover the budget shortfall.
To do that, the government has to borrow. But after a debut Eurobond issuance in 2017, Kuwait’s public-debt law lapsed. Al-Sheetan’s warnings about wages came as he tried, unsuccessfully, to convince lawmakers to support plans to borrow up to $65 billion.
His request coincided with a series of corruption scandals, some involving senior members of the ruling family, and lawmakers demanded the government end graft before accumulating debt.
Al-Sheetan is the fourth finance minister in as many years. Kuwait’s had 16 governments and seven elections since 2006.
The deadlock has undermined investor confidence. In March, S&P Global Ratings put Kuwait’s sovereign rating on negative watch. Moody’s Investors Service followed. The IMF said that month Kuwait’s “window of opportunity to tackle its challenges from the position of strength is narrowing.”
“The belief system in Kuwait is that we’re rich for infinity,” said Al-Sirri. “No one has the political capital to tell the Kuwaiti people that the party will be over soon if we don’t support change.”
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