March 201 2021:   The key take-away from our Kuwait conference call is that a compromise over a debt law between the parliament and Cabinet is eventually likely, although an agreement may not be a near-term prospect. The political outlook is key to the authorities' ability to issue a debt law and replenish the General Reserve Fund (GRF), in our view. We estimate recent steps taken by authorities lengthen the timeline for GRF liquidity crunch until 3Q21. 

 

Mixed signs on the political front near-term

 

December elections have increased the number of opposition Members of Parliament (MPs) to 24 out of 50 MPs in the National Assembly. The Constitutional Court rulings suggest that the Parliament is immune to legal challenges, according to our speaker.

 

Once it resumes its sittings on 18 March after its one-month suspension, the parliament is likely to have to approve the new Cabinet first, as per our speaker. Our speaker viewed the new Cabinet line-up as a sign of government compromise. The Constitutional Court's decision to expel from parliament an opposition MP suggests however tensions between the Cabinet and parliament could surface again soon, according to our speaker.

 

In response to the current standoff, our speaker did not foresee the Emir ruling by decree (due to likely legal constitutional challenges) or dismissing the parliament (due to domestic political implications). Our speaker saw the risk of devaluation or of running arrears as being overstated. However, he saw the possible threat of domestic arrears (salaries) as potentially forcing a compromise between the Cabinet and parliament.

 

Our speaker saw more parliamentary opposition on the draft law to allow KD5bn (US$16.5bn) in annual withdrawals from the Future Generations Fund (FGF) than on the draft debt law. Our speaker suggested compromise on the debt law could lead to a debt ceiling or a duration limit. Passage of the amnesty law requested by parliament could facilitate a compromise on financial laws requested by the Cabinet, as per our speaker. 

 

Our speaker did not judge a compromise over a debt law would lead to a sustainable reset in relations between the Cabinet and the parliament. As such, the structurally conservative economic setup is likely to dampen reform prospects, in our view.

 

GRF liquidity could last until 3Q21

 

Authorities have taken steps to mitigate the depletion of the liquid assets in the GRF. We estimate this lengthened the timeline for depletion of GRF liquidity until 3Q21. Clawback of accrued dividends from government entities could lengthen this timeline further. At US$65/bbl, we estimate the FY22 budget implies monthly withdrawal needs of KD0.7bn (US$2.3bn) from the GRF. Press reports suggest the GRF raised KD6-7bn (US$20-23bn) recently through asset swaps with the FGF (KD4bn) and a reversal of the past two years' 10% annual contribution to the FGF (KD2bn).