Oliver Wyman supports Kuwait prepare bonds for international sale

27 June 2016 Consultancy.uk

Kuwait is turning to the international bonds market to plug its budget deficit as the oil dependent country bears the brunt of the commodity’s low price. The move provides breathing room for the country to continue the diversification of its economy, as well as a focus on its improved efficiency – without dipping into its substantial wealth fund. Consultancy Oliver Wyman has been hired to provide strategic advice surrounding the bonds sale.

The State of Kuwait is a small constitutional emirate with a semi-democratic political system at the tip of the Persian Gulf. The country has a relatively small population of 1.3 million Kuwaitis and 2.9 million expatriates. The country’s economy is almost wholly dependent on oil – petroleum accounts for over half of GDP, 94% of export revenues, and 90% of government income.

Following the large drop in the price of crude in 2014, the country saw its government budget fall into the red in 2015, at -4.4% of its $288 billion GDP. The country was not thrown into immediate crisis however; it has relatively low levels of government debt as well as a large ‘rainy day’ fund, its Kuwait Investment Authority’s Fund for Future Generations which holds around $592 billion.

While the fund could see it through a number of years of depressed oil prices, the country has decided to use the deficit as an opportunity to cut inefficiencies from its economy by cutting wasteful spending, reducing utility subsidies and introducing corporate taxes, as well as start a programme of diversification – much like its neighbour Saudi Arabia.

Oliver Wyman supports Kuwait prepare bonds for international sale

Finance Minister Anas Al-Saleh, remarks that the oil decline “has clearly shown the structural issues in our economy. But, and this is the good side, with our robust budget, having low debt, strong local and international reserves, it helps us making reform quite steadily” without “reacting aggressively” with steep spending cuts.

Instead of dipping into its funds to plug the gap to its government finance, or cutting spending, the country has instead started raising funds from a recent local debt auction. “You have to finance the deficit one way or another,” Al-Saleh said. “We started going to the local market by the central bank and we are increasing our issuance. We see a great appetite. Now we are going to the international debt market.”

The move to go to the international debt market is aimed at raising (as yet) an undefined amount of money. In terms of strategic advice, it was recently announced that the preparations for the move have gone to consultancy firm Oliver Wyman. The consultancy firm has two offices in the UAE, which service the region, as well as being part of the joint venture between the Kuwait Investment Authority (KIA), the first sovereign wealth fund in the world, and the Kuwait Fund for Arab Economic Development (KFAED), the first Arab international development institution.

The size of the budget shortfall this year stands at around $26.5 billion, and may be lower if the price of crude picks up further. The country is said not to be cancelling any capital projects, and may even increase spending. “We are determined to go forward and spend as much as possible on our economy and infrastructure” comments Al-Saleh.

Kuwait’s move is in line with a trend among several Middle Eastern governments in the Gulf region after Abu Dhabi opened with its $5 billion sale in the Eurobond market April of this year. Qatar followed closely with an unprecedented $9 billion bond issue in May, as the Middle Eastern oil states and energy-exporting countries scurry to raise biddings for their own bond sales. Saudi Arabia and Kuwait too are looking toward debt sale as a means to bridge fiscal shortfalls, however market analysts expect they will not issue bonds within the next three to four months following the recent record bond issues of Abu Dhabi and Qatar.

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