Let us not freak out about public debt
KUWAIT: Kuwait is currently preparing to borrow money from international markets to fund part of its public budget deficit through issuing sovereign stocks and bonds. This will be the first time since 1992 when Kuwait had borrowed a $ 5 billion Syndicated Loan from international markets, and it was paid off before due time, which is in favor of boosting Kuwait’s image and enhancing its financial status. The estimated deficit in the last budget is around KD 5.5 billion and options to fund it are limited to either withdrawing from public reserves, borrowing or both.
Naturally enough, the decision will be subject to the cost of borrowing compared to returns on investments. Some economists believe that liquidating public reserves would have a negative impact on the country’s credit rating, and would therefore increase the debt’s cost if the country had to take a loan later on. In addition, issuing such government bonds will contribute to developing the local capital market and borrowing a foreign currency will provide part of the economy needs of that currency compared to domestic loans.
On the other hand, others believe that Kuwait owns a huge reserve and is capable of paying off the deficit without the need of adding the cost of borrowing from international markets. Meanwhile, the government has already decided to handle the deficit through borrowing from both local and international markets and paying off the balance from public reserves. A special unit was formed to administer the public debt, set strategies, assess risks and supervise the loan process in collaboration with the Central Bank and Kuwait Investment Authority (KIA).
Accordingly, the Central Bank already issued KD 1.4 billion-worth public debt bonds to fund the deficit up to October 2016 and the total value is expected to reach KD 2 billion. The government is currently promoting the idea of issuing $10 billion-worth bonds and appointed special financial advisors to administer the issuance of such sovereign bonds. In a bid to avoid having to issue a new law entitling it to borrow, the government is working on issuing the international bonds at a very short notice to benefit from the public debt law.
This allows it to borrow the maximum of KD 10 billion for a maximum duration of ten years until the end of 2017, not to mention that the government is working on passing integrated legislations to provide full flexibility of the public debt bonds and instruments. It is expected that demand for the Kuwaiti issue will exceed the primary issue volume, which already happened with all five GCC states that have already borrowed from international markets over the past two years to pay off their budgets’ deficits. It is also well-known that Kuwait enjoys an outstanding financial solvency, a stable regime and a remarkable judiciary. In addition to its huge oil resources, the size of Kuwait’s sovereign fund was $ 530550 billion by the end of 2016, which acts as public and future generations reserves.
Saudi Arabia was the most recent GCC state to get a loan last October when its issued $ 17 billion-worth bonds and the demand was four times as much as the primary issue of $ 15 billion. UAE and Qatar issues witnessed the same demand levels. Saudi’s issue is divided into three time segments; five, 10 and 30 years with respective interest rates of 135, 165 and 210 points on the benefits of US treasuries, which is higher than those paid by Qatar an Abu Dhabi.
That could be attributed to each country’s credit rating. Qatar pays 150 pints for a $ 3.5 billion loan due within ten years while UAE pays 125 points for a $ 2.5 billion loan due within the same period. It is expected that Kuwait’s issue will get interest rates close to those given to Qatar and UAE, if not better, especially since we enjoy the same credit rating of AA (according to Standards and Poor’s compared to only A- rating of Saudi Rabia), without any other considerations. We must not panic about sovereign borrowing because debt instruments are a necessity and part of public finance policies used worldwide.
Kuwait’s solid financial solvency, international economic circumstances and low interest rates represent a suitable opportunity to issue inevitable international bonds. In addition, this will provide enough time to execute needed economic measures gradually and without draining public reserves. It is mandatory to spend the loan on significant development project and not to pay off the loans through further borrowing. To do so, we have to carry on with economic reforms and rephrasing the economy’s philosophy. The real panic actually lies in further squandering, corruption and populist promises. — Translated by Kuwait Times