Kuwait has not enough cash to cover state salaries beyond October. And, Dubai again has loosened laws governing alcohol sales and possession of liquor. These developments are due to the coronavirus pandemic and the fall in oil price.
A Bloomberg report – “Kuwait Can’t Pay Salaries Beyond October, Minister Tells Parliament” – on August 19, 2020 said:
Kuwait has 2 billion dinars ($6.6 billion) worth of liquidity in its Treasury and not enough cash to cover state salaries beyond October, Finance Minister Barak Al-Sheetan warned parliament, as political wrangling again delayed efforts to return to international bond markets.
The Kuwait government is withdrawing from its General Reserve Fund at a rate of 1.7 billion dinars a month, meaning liquidity will soon be depleted if oil prices don’t improve and if Kuwait can’t borrow from local and international markets, he said.
As energy-rich Gulf States see their finances hammered by the collapse in oil prices and the coronavirus pandemic, the remarks point to a dramatic reversal of fortunes for some of the world’s wealthiest nations. Managing the crisis has proven especially challenging for Kuwait, where all laws must be approved by lawmakers who accuse the government of mismanaging public money and are blocking legislation that would allow it to borrow abroad.
The Kuwaiti finance minister’s dire projection came as the house discussed a report from the finance and economic committee, which rejected draft legislation that would have allowed the government to issue bonds.
The Kuwait Parliament on Wednesday decided to refer the debt law back to the finance panel so it can present a new report in two weeks, when the chamber will take a vote.
“Had we implemented this law in 2017, we wouldn’t be where we are today,” Al-Sheetan told lawmakers in reference to the debt law. After a debut Eurobond issuance in 2017, the law lapsed, rendering the government unauthorized to sell more bonds. It has been looking for approval from parliament to borrow as much as 20 billion dinars.
Lawmakers approved a bill to temporarily halt the transfer of 10% of revenue to the Future Generations Fund in years when the government runs a deficit. Designed as a buffer for when Kuwait’s oil reserves run out, the fund is managed by Kuwait Investment Authority, the world’s fourth-largest wealth fund.
Should it fail to win approval of the debt bill, the government will have the option of possibly seeking to issue the law by decree once the current legislature’s term ends ahead of elections later this year.
“There are real justifications for rejecting the public debt law,” lawmaker Adnan AbdulSamad said ahead of expected votes Wednesday on both the debt law and the halting of the 10% revenue transfer. “It’s difficult to approve the public debt law without budget reform.”
A 69% budget deficit
Kuwait’s budget deficit increased 69% to 5.64 billion dinars in the last fiscal year, and the government estimates it will more than double to 14 billion dinars in the current fiscal year, ending March 31, Al-Sheetan said. Wages and subsidies accounted for 76% of all spending of Kuwait.
The International Monetary Fund expects the government’s financial needs to grow at a rapid rate as its liquidity position weakens.
Negative rating
In March, S&P Global Ratings put Kuwait’s sovereign rating on negative watch, and Moody’s Investors Service followed.
The IMF said that month that while Kuwait has large financial buffers and low debt, its “window of opportunity to tackle its challenges from the position of strength is narrowing.”
In June, Sheikh Sabah Al-Ahmed Al-Sabah, Kuwait’s ruler, issued a call to transform the economy to one less reliant on oil and urged rationalizing spending.
More than 90% of the country’s revenue is generated from oil.
Other states in the Gulf region
Other Gulf States facing similar predicaments have come to count more on borrowing, and S&P analysts say the region will borrow a record amount this year.
Saudi Arabia, Bahrain and Qatar have all largely relied on debt to cover their deficits.
”In the medium to long-term, in the absence of borrowing, more austerity measures will have to be applied to public spending,” Al-Sheetan said. “In several decades, the FGF will run out, affecting the welfare of citizens and the state.”
An earlier report said:
The Kuwaiti parliament’s finance and economic panel turned down a draft bill that might have allowed the government to borrow at home and abroad just as liquid assets in the Treasury come close to being depleted.
“We rejected the public debt law, with 4 against and 1 abstention, because, in the absence of clear and real reform, things won’t be put right,” said the committee’s head, Safa Al-Hashem. The government also failed to explain where any borrowed money would be directed, she said.
It was at least the second time officials attempted to get the contentious bill through parliament. After a debut Eurobond issuance in 2017, Kuwait’s public-debt law lapsed, rendering the government unable to offer bonds.
The bill’s rejection means it will not move to the house for debate or a vote, leaving the government with the option of possibly seeking to issue the law by decree once the current legislature’s term ends ahead of elections later this year.
In the absence of access to debt, the government has been studying various alternatives to add cash to the Treasury. As part of that effort, the panel approved a proposal to halt the annual 10% transfer of revenue to the Future Generations Fund in years when the government runs a deficit.
A Finance Ministry proposal for the wealth fund to purchase 2.2 billion dinars of assets from the Treasury, in order to help boost liquidity, has also been carried out.
“Despite further anticipated spending cuts, the deficit will widen sharply this year due to lower oil prices, putting more pressure on declining reserves and making the approval of the debt law absolutely essential,” analysts for National Bank of Kuwait’s economic research said in a report Sunday.
Alcohol rules again loosened in Dubai
An AP report said on August 19, 2020:
Dubai again has loosened laws governing alcohol sales and possession of liquor as the sheikhdom tries to claw its way out of an economic depression worsened by the coronavirus pandemic.
The outbreak of the virus exacerbated the already-gathering economic storm engulfing the emirate, which has seen mass layoffs thin the ranks of its foreign workforce and empty homes even amid slight signs of recovery.
Now, experts warn the sheikhdom’s crucial real estate market is on track to hit record lows seen in the 2009 Great Recession.
“It’s been a challenging year and there’s no hiding from that for any business — particularly those in the hospitality industry,” Mike Glen, managing director for the United Arab Emirates and Oman for alcohol distributor Maritime and Mercantile International, told The Associated Press in an emailed statement.
Alcohol, a major barometer of Dubai’s economy
Alcohol sales have long served as a major barometer of the economy of Dubai, a top travel destination in the UAE, home to the long-haul carrier Emirates. Ice-cold bottles of beer tempt tourists on hotel beaches, while decadent Champagne-soaked brunches, combination of breakfast and lunch, draw well-to-do crowds of expatriate residents.
The sales also serve as a major tax revenue source for Dubai’s Al Maktoum ruling family.
In Dubai, alcohol sales in general reflect the confidence of buyers in their own finances and in turn, the economy. Those sales already showed the trouble Dubai faced amid falling global energy prices and a weakening real estate market. Dubai also postponed its Expo 2020, or world’s fair, to next year, which is another major blow.
Alcohol in millions of gallons
Overall sales of alcohol by volume fell sharply in 2019 to 128.79 million liters (34 million gallons), down some 3.5% from 133.42 million liters (35.2 million gallons) sold the year before, according to statistics from Euromonitor. The 2019 sales are down nearly 9% from 2017, which saw 141.51 million liters (37.3 million gallons) sold.
Amid the lockdown, Dubai’s two major alcohol distributors began legal home deliveries of alcohol for the first time in hopes of boosting the sales. Now, the city-state has changed the very system granting permission to residents to legally purchase alcohol.
Red Card and Black Card
By law, non-Muslim residents are supposed to carry red plastic cards issued by the Dubai police that permit them to purchase, transport and consume beer, wine and liquor. Otherwise, they can face fines and arrest — even though the sheikhdom’s vast network of bars, nightclubs and lounges never ask to see the permit.
Those red cards now have been replaced with a black card and a simplified application process only requiring an Emirati national ID card.
An application no longer requires an employer’s permission. Previously, employers could block non-Muslims from obtaining a card even if an employee qualified for it — which happened for some expats working for Emirati companies whose owners had religious objections to alcohol.
Purchase restrictions based on salaries also have been eased. Previously, residents would get around those restrictions by traveling to five of the other seven sheikhdoms that make up the UAE. Sharjah, the UAE’s seventh emirate that borders Dubai to the north, outlaws alcohol, as do the nearby nations of Iran, Kuwait and Saudi Arabia.
The new card system comes as Dubai also now allows tourists and visitors to buy alcohol from distributors simply by using their passports, closing a loophole that made visiting imbibers unable to get a permit subject to arrest for possessing alcohol.
The UAE as a whole still faces the challenge of the coronavirus — with some 65,000 confirmed cases and 367 deaths as it saw the biggest one-day jump in confirmed cases in over a month. But Dubai has been aggressively advertising itself as reopened to tourism and now appears set to host Indian Premier League cricket, beginning in September.
There have been signs of a tentative and slight recovery starting to take hold. In July, Dubai’s non-oil sector saw its first improvement in five months, according to a monthly survey by IHS Markit and Emirates NBD bank. But that appeared driven by deep cuts in price discounts, particularly in travel and tourism, the report said.
“The recovery in activity has not been sufficient to prevent firms continuing to lay off workers as they seek to reduce costs,” wrote Khatija Haque, the head of research and chief economist at Emirates NBD.
Those layoffs struck Emirates, the flagship of Dubai’s state investment firm, particularly hard with thousands of employees fired. That’s not counting all the other businesses large and small through the city similarly hurt by the virus — particularly in its bubble-or-bust real estate market.
Dubai’s biggest private real estate company, DAMAC, which operates U.S. President Donald Trump’s eponymous golf club in the UAE, just reported a net loss of $105 million for the first half of 2020. The company’s chairman, Hussain Sajwani, blamed the pandemic for the poor results.
“Resulting travel restrictions impacted the economy and the real estate sector, and we will see a difficult market for the coming 18 to 24 months,” Sajwani said.
Empty homes
The mass layoffs have seen a noticeable number of for-rent and sales signs in front of homes and apartments across the city.
The Dubai firm Property Monitor said in a report this week that real estate prices likely would set new record lows by the end of the third quarter of this year.
Rental listings have risen by 11% in Dubai as over 45,000 new residential units have entered the already soft market, according to REIDIN Data and Analytics, which tracks the market. Another 120,000 units are expected to come into the market in the next two years, further pushing down prices, REIDIN said.
Both sales and rental prices have dropped about a third since a market high in 2014, when Dubai announced it would be hosting the Expo.
The “current pandemic, coupled with oversupply in the market and reduced occupancy levels, caused and increase in the rate of decline of prices for both apartment and villas especially in the second quarter,” said Ozan Demir, the director of operations and research at REIDIN.
Oman’s sultan names foreign, finance ministers
Another report said on August 18, 2020:
Oman’s sultan on Tuesday named foreign and finance ministers for the first time, putting officials in positions long wielded by his late predecessor.
Sultan Haitham bin Tariq Al Said also issued 28 decrees renaming and reorganizing ministries in a nation he took over in January, following the death of longtime ruler Sultan Qaboos bin Said, who died after 50 years in power.
Previously, Sultan Qaboos held the position of foreign minister, with Yusuf bin Alawi bin Abdullah serving as a minister of state for foreign affairs. He also maintained control of the finance ministry, likely a sign of his desire to hold onto power after deposing his father in a 1970 palace coup.
“I think there was a long delay in making changes in Oman due to the sultan’s long illness,” said Kristin Smith Diwan, an analyst at the Arab Gulf States Institute in Washington. “Sultan Haitham is making up for lost time very quickly.”
In his decree Tuesday, Sultan Haitham named Badr al-Busaidi as the country’s new foreign minister. For finance minister, Sultan Haitham named Sultan bin Salim al-Habsi.
It is not immediately clear what effect the appointments will have, though Sultan Haitham has been focused on reshaping Oman’s government since taking the throne. That is even as international events swirl around the sultanate’s borders — such as tensions between Iran and the U.S. and the neighboring United Arab Emirates beginning to open diplomatic ties to Israel.
Oman remains a key interlocutor between the West and Iran, as well as Yemen’s Houthi rebels, assisting in getting prisoners released in the past.
Sultan Qaboos did host Israeli Prime Minister Benjamin Netanyahu in a surprise visit in late 2018.
Yusuf bin Alawi just Monday called both Israeli and Palestinian officials to reiterate Oman’s position that it supports Palestinians’ hope to have its own state with East Jerusalem as its capital.
Oman’s financial struggles
Oman also faces financial struggles as global oil prices remain low. Oman, whose debt is rated “junk” by all major ratings agencies, is struggling with a widening budget deficit and economic downturn from the double blow of low oil prices and the coronavirus pandemic.
Credit-rating agency Moody’s in June downgraded Oman and put its outlook as negative, warning the sultanate’s efforts at dealing the economic crisis was “slow and fell short of stabilizing government debt levels.”
A 60% debt
Debt now stands around 60% of the country’s gross domestic product.
Oman’s fiscal deficits and external debt maturities will amount to $12 billion to $14 billion, or about 20% of GDP, per year from 2020 through 2022, according to Fitch.
The government has not tapped the overseas debt market since raising $3 billion last year. Fitch said Oman recently secured a $2 billion loan in anticipation of bond issuance abroad later this year.
Stabilizing Oman’s economy likely will require foreign help, though accepting money from the Emirates or Saudi Arabia could see those nations trying to reshape the sultanate.
“The country can’t any more afford to live off of an oil wealth that’s dwindling,” Kristin Smith Diwan said.
Stakes rising in Oman for regional financial aid
Potential assistance for Oman from wealthier neighbors in the Gulf may not be quite the turning point it was for Bahrain two years ago.
Oman’s bondholders are hoping it obtains a similar lifeline, and credit assessors from Fitch Ratings to S&P Global Ratings see that as a possibility. The sultanate discussed the option with other Gulf States, people with knowledge of the matter told Bloomberg in June.
But the size of any aid package will likely “be calibrated to facilitate, but not meaningfully replace, debt market funding,”
Fitch analysts including Hong Kong-based Krisjanis Krustins said this week as they lowered Oman’s sovereign rating deeper into junk. The sultanate’s dollar-denominated bonds have lost 1.6% this year, the worst performer in the region.
That raises the stakes for Oman, which has lagged behind most peers in implementing fiscal reforms despite dwindling reserves and a budget deficit Fitch estimates could reach 20% of gross domestic product this year.
Investors demand a premium to hold Oman’s debt over Bahrain’s note of similar maturity — a reversal from 2018 before the $10 billion rescue lifted the fortunes of the island nation — even though its debt is rated one level higher by Fitch and S&P.
Oman does not have much time to “muddle through,” said Michael Cirami, a Boston-based money manager at Eaton Vance Corp., which oversees about $465 billion. “They need to make really tough decisions in the next year or so.”
The outlook is a major challenge for Sultan Haitham Bin Tariq Al Said. The ruler made lower debt a priority when he succeeded his cousin in January, and authorities have since looked to lower spending as declines in oil prices and the pandemic cut into revenue.
Some ministries scrapped
Decrees issued on Tuesday scrapped some ministries and merged others. The move may be “geared towards greater delegation of executive responsibilities away from the Sultan,” and could improve the government’s transparency and decision-making, which have slowed Oman’s economic reforms and fiscal adjustment in the past five years, said Moody’s Investors Service’s senior analyst, Alexander Perjessy, in Dubai.
The series of decrees also dissolved and merged government bodies into new ministries, renamed entities and redefined functions.
The oil and gas ministry became a ministry of energy and minerals, with Mohammed bin Hamad al-Rumhi remaining minister.
Oman is part of the OPEC+ oil producers’ alliance.
“This has a potential to alleviate some decision-making capacity constraints and reduce bureaucratic delays in policy implementation, which have slowed Oman’s economic reforms and fiscal adjustment.”
VAT
Some of the more painful measures, including value added tax and a possible personal income tax, will have to be implemented during a critical period through 2022, according to Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital in Dubai.
Sultan Haitham said earlier this year the government would work to reduce public debt and restructure institutions to bolster the economy.
“The fiscal demands on the state and the shifting grounds of regional politics require an update,” said Kristin Smith Diwan of the Arab Gulf States Institute in Washington.
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