Kuwait's debt law gridlock poses first economic test for new emir

DUBAI, Sept 30 (Reuters) - Kuwait’s new Emir Sheikh Nawaf al-Ahmad al-Sabah faces the urgent task of overcoming legislative gridlock on debt legislation needed to tackle a liquidity crisis in the wealthy oil producing country.

Parliament has repeatedly blocked the bill, which would allow Kuwait to tap international debt markets, but the issue has gained urgency as low oil prices and COVID-19 strained state finances and led to the rapid depletion of available cash reserves.

“The country needs to quickly pass a new public debt law to ease liquidity shortages,” said Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes.

The new ruler, sworn in on Wednesday after the death of his brother Emir Sheikh Sabah al-Ahmad al-Sabah, takes the helm with the nearly $140 billion economy facing a yawning deficit of $46 billion this year.

Oil prices at some $40 a barrel are largely below what is needed to balance the OPEC member state’s budget, in which public sector salaries and subsidies accounted for 71% of spending for the 2020-2021 fiscal year.

“The recent deadlock on the funding situation directly threatens the government’s ability to function and pay salaries, which represents a significant escalation in the brinksmanship between the two branches of government,” said Moody’s.

The ratings agency, which downgraded Kuwait last week due to higher liquidity risks and concerns over its institutional strength, said it expected the proposed debt law to be passed by emiri decree between October and December.

Parliamentary elections are due to be held later this year, though authorities have not yet set a date.

Lawmakers opposed to the bill have called for clarity on government plans to reduce reliance on oil exports, which accounted for 89% of revenues last fiscal year.

Analysts say parliament has hindered efforts to push through sensitive reforms such as introducing value-added tax in a country whose citizens are used to generous state subsidies.

Kuwait could see its economy shrink by 7.8% this year, Deutsche Bank has estimated, in what would be one of the worst economic crunches among Gulf oil exporters.

Sheikh Nawaf’s succession is not expected to significantly alter Kuwait’s economic outlook, at least in the short term.

“On the economic side, we think it’s more of the same,” said Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital, but added that resolving the debt saga would boost prospects.

The emir’s choice of crown prince and premier, who would be tasked with managing the government’s often difficult relationship with parliament, is being closely watched.

Kuwait has the most powerful parliament in the region, but a series of assemblies have been dissolved in recent years amid power struggles between the opposition and the cabinet, which is dominated by the ruling family. (Reporting by Davide Barbuscia and Hadeel Al Sayegh, Editing by William Maclean)