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Aerial view of city skyline, Kuwait City, Kuwait. Image used for illustrative purpose Getty Images
Any sovereign debt issuance from Kuwait, after a gap of eight years, is expected to be met with a favourable response from investors, despite a recent statement by the IMF that the oil producer’s economy is in recession.
“I expect there will be strong appetite for Kuwait’s return to the eurobond market after an eight-year hiatus,” said Fady Gendy, Fixed Income Portfolio Manager at the Dubai-based Arqaam Capital.
On Monday, Finance Minister Noora Al Fassam said that Kuwait was prepared to return to international debt markets soon.
A recent media report also said Kuwait’s cabinet is expected to approve a new law that could enable $65 billion to be raised over 50 years.
Kuwait’s last issuance was in 2017, just before the previous debt law expired. The passage of a law that would allow it to return to the debt markets has been stalled for years by infighting between fractious parliaments and cabinets.
In May 2024, the Emir of Kuwait dissolved the cabinet and suspended parts of the constitution for four years. The plan was that, in the interim, the government would undertake a review and propose amendments within six months. Eight months later the cabinet still legislates by passing decrees with the Emir giving the final stamp of approval.
Kuwait, which accounts for about 7% of the world’s hydrocarbon reserves, depends on oil receipts for up to 87% of revenue. The OPEC+ oil production restrictions have squeezed Kuwait’s oil exports, and, by extension, its revenue inflows. The IMF has forecast a 2.8% contraction in 2024, followed by a recovery in 2025 as the production cuts unwind.
In its budget for 2025-26 announced last week, Kuwait pencilled in a deficit of $20 billion, or 13% of GDP.
“Considering oil prices have been lower than what Kuwait has budgeted and are expected to continue at the same level — provided there aren’t any significant geopolitical events and changes in the OPEC+ agreed production cuts — raising of debt could help address any slowdowns in the implementation of economic reforms planned by the government and help manage part of the fiscal deficit,” Bhavesh Gandhi, Partner at KPMG in Kuwait, told Zawya.
Investor appetite
A potential sovereign issuance will be backed by very strong external buffers, including liquid assets of the Kuwait Investment Authority (KIA) and very low level of public debt.
S&P Global Ratings estimates the KIA's total assets, including the General Reserve Fund (GRF), a liquid fund that is used to finance deficits, and the much larger Future Generations Fund, to average 447% of GDP from 2024 to 2027.
In the absence of a debt law, the government is forced to dip into the depleting GRF to fund its fiscal deficits.
“Demand will primarily come from a mix of local buyers, including bank treasury desks for whom Kuwait risk will carry zero or minimal capital charge, as well as rating-sensitive international buyers, predominately from Asia. Emerging market-dedicated and crossover investors may be less inclined due to the low yield and spread, a position reflected in their current underweight stance on the other AA/A-rated GCC sovereign credits,” said Gendy.
Kuwait’s only outstanding eurobond issued, maturing in March 2027, is now yielding around 4.70%. In comparison, the Abu Dhabi eurobond maturing in October 2027 yields around 4.50%, reflecting Abu Dhabi's higher credit rating and lower break-even oil price.
The credit profile of Kuwait is on par with the best in the region, said Junaid Ansari, the director of investment strategy and research at Kuwait-based Kamco Invest. “So, pricing of Kuwaiti bonds/sukuk is not expected to be very different from the recently issued bonds from regional sovereigns.”
KPMG’s Gandhi said while yields are expected to remain tight, Kuwait’s AA- rating would present investors with a risk diversification opportunity.
No urgency, however
The debt law, which has been discussed in Kuwait’s Parliament previously, was opposed by most of the MPs, who wanted fiscal reforms measures to be passed first.
“One of the pillars of the National Development Plan, i.e., Vision 2035, is a sustainable diversified economy. We are seeing the Kuwait Government move in that direction. Having said that, passing the Debt Law could support the diversification efforts, as the government will be able to launch infrastructure and tourism projects that may have come to a standstill,” added Gandhi.
According to the Fitch Ratings forecast for FY 2025, assuming a resumption of borrowing, 30% of Kuwait’s deficit would be financed by debt issuance. Its current outstanding debt is around $9 billion, according to LSEG data.
Ansari said, however, that there is sufficient projects activity in the country, and that coupled with the current oil price at above the $75/barrel mark, any urgency to issue debt to finance fiscal deficit has subsided. In fact, he expects the fiscal deficit to fall below the budgeted amount.
“We do not expect the government to hurry in issuing sizeable bond/sukuk. However, we can expect a few issuances that are aimed at merely entering the market and testing demand.”
According to him, the Kuwait government is serious about expanding the non-oil sector. “This was evident from the activity in the projects market in Kuwait during 2024, with project awards at KWD 9.5 billion, the highest since 2017. And the bulk of these projects were driven by the government. We can expect to see an acceleration in non-oil activity in the near term.”
(Reporting by Brinda Darasha; editing by Seban Scaria)
