The country has been slow to sell bonds compared with its neighbours in the GCC, making the nation more reliant on oil sales, which account for more than 90% of public revenue
Kuwait should sell bonds rather than rely on oil revenue to fund $110bn of projects including a rail system so the Opec producer can cushion against a drop in energy prices, the International Monetary Fund said.
The Gulf state is reviving a development plan aimed at building hospitals, power stations, new roads, a causeway and a port as the government seeks to reduce its reliance on oil sales. It is dedicating as much as $18bn from this year’s budget for the investment programme after oil revenue grew 44% in the 2011-12 fiscal year. The price of Brent crude fell as much as 18% off 2013 peaks last month.
“They need a significant amount of financing for the infrastructure investment that they are undertaking,” IMF mission chief for Kuwait, Ananthakrishnan Prasad, said in a phone interview on May 1. “By going to the debt market the government wouldn’t ‘‘need to fully depend on the budget for financing the development plan,’’ he said.
Kuwait has been slow to tap sell bonds compared with its neighbours in the Gulf Co-operation Council, making the nation more reliant on oil sales, which account for more than 90% of public revenue. The government has an opportunity to develop the local debt market after GCC borrowing costs dropped to records this year.
Issuers from Kuwait, the third-biggest producer in the Organisation of the Petroleum Exporting Countries, have sold almost no bonds so far this year even as offerings from GCC states jumped to a record $18bn, data compiled by Bloomberg show. Kuwait has about $12bn of outstanding debt, compared with about $28bn in Abu Dhabi, the capital of the UAE, and $50bn in Qatar, the data show.
‘‘The government should start issuing domestic debt,’’ Prasad said. ‘‘Apart from helping to develop a sovereign yield curve, it provides a cushion to the budget against oil price shocks, and also equips the central bank with more tools to conduct liquidity management.’’
Brent crude, which averaged $112 a barrel last year, fell below $100 a barrel in April for the first time in nine months.
The country risks exhausting all oil revenue by 2017 if it continues with its current spending policy, the IMF warned last year. More than half the budget goes toward covering the costs of salary increases, subsidies and government handouts, government data show.
Kuwait has been slow to create an environment conducive to building a debt market because ‘‘the government doesn’t need to borrow,’’ according to Jassim al-Saadoun, head of Kuwait-based Al-Shall Economic Consultants. The country posted its 13th straight surplus in the 2011-12 fiscal year. Still, relying on state revenue for spending ‘‘isn’t sustainable,’’ he said.
Prasad, from the IMF, pointed to other countries in the GCC that have moved toward relying more on debt-raising to finance more than $1tn of projects. Qatar, which is set to host the 2022 soccer World Cup, started selling treasury bills two years ago and began quarterly domestic bond sales this year. Government-related companies are also tapping international markets. These borrowings are helping to develop ‘‘the domestic market and the yield curve,’’ Prasad said.
Kuwait’s limited number of corporate bonds rallied in the past year as investors seek exposure to Gulf state, which holds an AA rating at Standard & Poor’s. The government and parliament this year pledged to put the development plan, first approved in February 2010, on fast track after elections in December resulted in an opposition-free legislature. Plans include a new $14bn oil refinery and the Al-Zour North power station. Kuwaiti companies looking to tap the debt market include United Real Estate Co, an affiliate of Kuwait Projects, which said last week it plans to raise as much as 60mn dinars ($211mn) from a bond sale.
‘‘The bonds that have been launched internationally have performed well,” said John Bates, emerging markets corporate fixed income analyst at PineBridge Investments. “Kuwait has strong AA credit ratings, as an alternative to the UAE or Qatar. A deeper international bond market would be positive for the funding profile and the needs of Kuwaiti banks and corporates.”
