**Written and disseminated to select contacts on April 1**



Ratings downgrades in Kuwait and Oman, prompted by plunging oil revenues, widening deficits and increased borrowing needs, will make accessing global funding more expensive and difficult, especially for regional economic laggard Oman.

Although important, ratings do not always reflect the full picture, nor gauge investor appetite for Gulf risk once market conditions improve; a regional risk premium will likely be factored in. The coronavirus pandemic and prospect of a prolonged global recession are major challenges for all of the region’s governments; however, the GCC has reserves, buffers and – when needed – neighbourly solidarity.



Last week S&P downgraded Kuwait to AA- from AA on the basis of significantly lower revenues from oil exports in 2020, assuming oil prices at $30/b and limited progress on reform. On Monday, Moody’s put the country’s rating on review for a possible downgrade.



  1. The 2020 IMF Staff Report released this week projects the budget deficit for 2020/21 at KD0.3bn ($938.6m). Given Kuwait’s statutory requirement for adding 10% of oil revenues per annum to the Fund for Future Generations – one of the two main funds managed by the Kuwait Investment Authority (KIA) – and reinvesting earnings, the actual deficit rises to KD7.5bn ($23.5bn), which the IMF projects would call for KD5bn ($15.6bn) in external borrowing this year. However, these projections now appear too optimistic. Assuming oil prices at $30/b in 2020 and $45/b in 2021, the budget deficit will more likely rise to almost KD11bn ($34.4bn) and the external borrowing requirement may rise to KD9bn ($28.1bn).
  2. The government plans to plug this year’s budget deficit – estimated in January at KD9.2bn ($28.8bn) assuming an oil price of $55/b – through the General Reserve Fund, the second fund managed by the KIA. A spending freeze plus drawing down the GRF to plug the deficit are not viable medium-term policy options. However, a new public debt law that would raise the debt ceiling and allow for longer dated issuance is yet to be approved. Without the new legislation, the state cannot issue international bonds.
  3. Policy paralysis is not a new, or even recent development. A belligerent National Assembly has been responsible for stalling major reform efforts for years, and cabinet reshuffles are extremely common as MPs bring to light corruption scandals among government ministers. Despite this, the state budget in the past was able to sustain the welfare state and add to its large asset base. Looking ahead, borrowing needs are likely to almost double from what was signalled to the IMF during their last visit amid the lower-for-longer oil price environment in order to maintain the welfare system Kuwaitis are so accustomed to and keep up the asset base.



  1. Prospects for a quicker economic recovery in the aftermath of COVID-19 seem brighter for Kuwait than for regional peers. It moved early towards severe restrictive measures and so far there have been no reported deaths from the virus. A smaller population – the majority of which is employed in the public sector – high testing rates and lower exposure to sectors such as tourism could aid recovery. However, ultimately, a global recovery in oil prices and pick-up in Asian demand, where the largest proportion of Kuwait’s oil exports go, will support revenues.
  2. Any significant budgetary cuts proposed by the government will be seen as an attempt to erode Kuwait’s generous social welfare system, and likely to be resisted by MPs.



Moody’s and S&P both downgraded Oman last month (Ba2 and BB respectively), pushing the  non-OPEC  oil producer further into junk-rating territory.



  1. With prices averaging $30/b for 2020, it is likely the budget deficit will jump to 20% of GDP taking into consideration a near 50% decline in oil revenues, modest expenditure cuts and a smaller nominal GDP due to lower oil prices.
  2. Oman’s difficulty lies not in borrowing more – although its funding needs are higher than its neighbours – but in repaying existing debt, with nearly $55bn due in 2020-25, according to Refinitiv data. Moody’s estimates government debt will stabilise at 67% of GDP in the next few years.
  3. A troubled outlook could accelerate much needed and long overdue economic and fiscal reforms. Fiscal adjustment programmes have been announced, and a slew of new top-level economic advisory hires are expected to take up prominent roles under Sultan Haitham bin Tariq. These will help drive policies to cut spending, sell assets and implement economic development strategies, including a push towards increasing non-oil revenues. However, all GCC states have struggled with diversification and although Oman shows potential, particularly in the logistics, tourism or mining sectors, current market conditions make those goals seem further away.



  1. The leadership will be aware of the unpopularity of some necessary austerity measures, raising the possibility of protests and delays. Oman’s construction industry, reliant on cheap foreign labour, is struggling to pay workers amid the  halt in activity forced by coronavirus. Job cuts across all sectors and industries are very likely.
  2. Saudi Arabia and Qatar could afford to step in to help Oman’s leadership economically – but at what price? Some level of political posturing for influence in Oman – which has tried to remain fiercely independent from its wealthier neighbours – could become a real possibility in the current environment.


Rachna Uppal | Senior Analyst | r.uppal@castlereagh.net

Forecasts and financial analysis provided by Fareed Mohamedi, Senior Advisor at Castlereagh Associates and Managing Director at SIA Energy International.