The Kuwaiti growth model, similar to that of the GCC, is based on an oil economy that has created jobs in the public sector for nationals and resulted in positive economic and social gains in the past. However, with the declining relative importance of oil, its price is expected to persist near present levels and the growth performance is expected to be hindered by fiscal consolidation. Therefore, the development of an efficient debt capital market will boost the growth and fulfill the need for economic diversification and sustainable growth in the non-oil sector.
Review of 2020
The Kuwaiti Islamic finance market is a nascent but developing segment of the country’s financial sector. While Islamic banking retains a 35% market share, other segments, particularly the capital market, have significant room for development and growth. Kuwait has the regulations and tax neutrality to enforce Islamic finance structures but lacks the holistic regulatory framework for Islamic finance of other developed Islamic financial markets.
The two main prerequisites for reforms are trust and partnership between the public and private sectors. Facing serious shortcomings in its long-term economic stability, Kuwait has a dichotomy of reforms versus being one of the last GCC countries to be affected by oil price volatility. Kuwait’s budget has recurrent non-productive spending, institutional efficiency is low and the ease of doing business is one of the GCC’s lowest.
Notwithstanding these deficiencies, the Kuwaiti authorities have taken steps to correct some of them. There are two important laws currently being considered by parliament, namely the Sukuk Law and the Public Debt Law. The approval of this body of legislation would greatly enhance the legal foundation of the financial sector by developing the tools and the right environment for local and international issuances.
While the issue of debt capital market issuances is increasingly becoming academic and standardized, the risks due to Kuwait’s learning curve cannot be underestimated. The availability of human capital and institutional excellence in managing the strict deadlines remain the prime risks. Such a process can undoubtedly be highly critical for all stakeholders involved, ending with mature institutions such as the Kuwait Investment Authority and the Central Bank of Kuwait.
Preview of 2021
There should be a debate to articulate the key risks in Kuwait entering the international sovereign debt market with questions required to bring clarity such as:
• Will Kuwait continue to see the same budget anomalies in the post-debt budget?
• Can the country keep up with the scrutiny of international capital markets to address the anomalies? And through what governance framework?
• How can Kuwait use sovereign bonds and Sukuk as factors of stability and investment diversification, and not as ‘crowding out’ threats to the private sector?
Once a governance framework is put together involving the relevant national and international stakeholders, sovereign bond and Sukuk issuances can take place. This will represent an opportunity for Kuwait to invite a new type of scrutiny from international capital markets as to the sustainability of its budget.
A government’s credibility as an issuer relies on sound and prudent debt management. The framework of sound debt management in many jurisdictions is based on having a clear debt management objective, proper coordination with a monetary and fiscal policy, a dynamic risk management framework, an effective institutional framework and a robust operational capacity enabling efficient funding and sound risk management practices.
Some experts have suggested a package of three policy measures to develop regional bond markets. Namely, a regional credit guarantee agency, a securities rating facility and a clearing and settlement capacity. Combined, these elements are the necessary infrastructure components upon which to build a regional securities market. The development of a robust government securities market in developing countries will often lead and aid the development of a private sector securities market. At the same time, private debt markets need other elements to be successful, most importantly: a disclosure system, a credit rating system and bankruptcy laws. Regulators should also avoid possible crowding out and legal restrictions that inhibit the development of a private sector securities market.
Finally, the establishment of an efficient debt capital market in Kuwait will have a positive impact on growth and spill over to other markets as a result of the required upgrade to market infrastructure.