London – “Al-Quds Al-Arabi”: Simon Watkins, an analyst at Oil Price, questioned the ability of the new Emir of Kuwait to reform his country. He said that Sheikh Nawwaf Al-Ahmad Al-Jaber Al-Sabah, 83, assumed power in his country after the death of his half-brother Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah (91 years), and he faces a major challenge represented by the ongoing budget deficit and restrictions on increasing debt and low oil prices. This is in addition to the infighting within the Legislative Council and the dispute with the Saudi neighbor.
The challenge was evident before the death of Sheikh Sabah, and was reflected in the downgrade of Kuwait by the credit rating company, Moody’s, which justified its decision by “liquidity risk.”
The challenge was evident before the death of Sheikh Sabah and was reflected in the downgrade of Kuwait by the credit rating company, Moody’s, which justified its decision by “liquidity risk.” This decision will not help Kuwait benefit from the bond market to fund companies in the short and long term.
Justifying the downgrade of Kuwait’s credit rating by two degrees, Moody’s said that it expects the net sovereign issuance to reach 27.6 billion Kuwaiti dinars ($ 90 billion) the Kuwaiti government’s financing requirements between the current fiscal year and the fiscal year ending in 2024. The problem of this was clear from the minister’s statements. Finance Maryam Al-Aqeel, who indicated that the Kuwaiti National Assembly refused to approve the Public Debt Law. The government submitted a request to the council to allow it to borrow about 20 billion Kuwaiti dinars, but it was rejected, leaving Al-Aqil no choice, and pushing her to take from the General Reserve Fund. Although Al-Aqeel emphasized that borrowing and increasing public debt is cheaper than withdrawing money from the sovereign fund.
This was the concern of Moody’s, who emphasized that “the continuing stalemate in dealing with the financing situation now directly threatens the government’s ability to operate and represents an important escalation in the dangerous policies between the various branches of government.”
As is evident, Kuwait entered a state of economic contraction by 1.1% in the last quarter of 2019 and at the same period in the year before it and even before the oil price war that Saudi Arabia started – and two months before the dangerous decision. Al-Aqeel said that the price Kuwait needs in order to avoid the budget deficit is $ 81 per barrel of oil (Brent crude). This came after announcing the 2020/2021 budget, projecting a deficit of 9.2 billion Kuwaiti dinars (30 billion US dollars). This is a sixth consecutive deficit year and higher than the 2019/2020 budget, in which the deficit was 8.27 billion Kuwaiti dinars, even after 10% was transferred to the Al-Ajyal Fund, which is supervised by the Kuwait Investment Authority. Kuwait derives 50% of its GDP, more than 90% of its oil exports and 90% of its fiscal bills from hydrocarbon products. Therefore, the possibility that oil prices will remain low makes the foreseeable future negative, not for Moody’s, but for Al-Aqil and the new emir, Sheikh Nawwaf.
Hence, the dangerous financial situation will act as a brake on Kuwait to extricate itself from the financial hole and increase the rates of oil production even if its prices are low. Away from the OPEC plus agreement that set oil levels, Kuwait plans to increase production rates to 4 million barrels per day.
In April, its production reached 3.15 million barrels per day. This is a result of production returning from the neutral / divided zone it shares with Saudi Arabia and an increase in production from the heavy oil fields in the north. By August, production had returned to 3 million barrels per day, mostly from heavy oil and sour intermediates, and it came after the Kuwait Oil Company announced reducing its oil and gas budget to 3 billion Kuwaiti dinars (9 billion dollars) from 3.7 billion Kuwaiti dinars. Whether the Emir can overcome political paralysis or not is something that needs to be waited, although Prince Nawwaf has a long experience in political work where he held the Ministry of Interior (1978-1988) and the Ministry of Defense (1988-1991) and worked as the Acting Minister of Labor and Social Affairs (1991). – 1992) and deputy chief of the National Guard (1994-2003), and from 2003 until he assumed power, he was crown prince. All these positions, especially his work in the Ministry of Defense and the Interior, which are concerned with the security aspect, gave him a picture of how to deal with Saudi fluctuations, which he needs to deal with during the OPEC Plus deal (and future contracts), but rather to protect Kuwait’s interests in the neutral region. At the present time, this works in a smooth manner, but this does not prevent the Saudis from closing them without introductions and for retaliatory reasons, as they did in the past. Before production resumed this year, the area remained closed for five years, which was closed due to what the Saudis said was not committed to the new environmental and air emissions standards issued by the Saudi Meteorological and Climate Authority. According to this authority, gas leaked from one of its 15 production platforms (in addition to producing between 280,000-300,000 barrels per day, the region produced 125 million cubic feet of gas).
But the real reason behind the closure, according to sources in the Middle East who spoke with “Oil Price”, is that Saudi Arabia wanted to show its neighbor who is in fact controlling the region. This came after the increase in Kuwaiti competition with Saudi Arabia in its major markets in Asia. In addition to this, Kuwait made it difficult for Saudi Chevron to obtain licenses to operate in the neutral zone, which limited Saudi Chevron’s ability to proceed with plans for the Wafra field and to increase production of heavy oil to 800,000 barrels per day. When Kuwait began to obscure production levels and capabilities that were not produced or maintained, Saudi Arabia, after the Houthi-Iran attack on the Abqaiq facility in 2019, tried to search for oil that would allow it to reach it in the neutral zone. In fact, Saudi Arabia’s closure of the neutral zone and the price war it waged in the period between 2014-2016 are the two factors that caused the Kuwaiti financial crisis.
The large Kuwaiti budget deficit began in 2014, when the Saudis closed the Khafji field in the neutral zone, depriving Kuwait of its additional capabilities in one move. In addition to this, the closure complicates the task for Kuwait to proceed with its economic plan “Kuwait Project” to increase its production of crude oil and concentrate production at the level of 4 million barrels this year. Despite the negative outlook from all of the above, there is reason to be optimistic about Sheikh Nawaf, far from the negative outlook close to Moody’s decision, but the plan to include Kuwait in emerging market indicators determined by MSCI will proceed according to the plan, although it may be delayed until Beyond November. In this context, MCSA said that the delay from May to November was due to Covid-19 and that the Kuwaiti Stock Exchange adheres to the required standard for classification in emerging market indices. This means that the countries ranked in the indices will amend their details to include Kuwait.
The second positive matter is the Kuwait Oil Company’s announcement of plans to issue tenders for the purchase of 24 platforms to support plans to expand oil and gas production. At the same time, the export operations of the first shipment (500,000 barrels) of heavy oil to the global market started from the southern Ratqa field. Director of the Kuwait Oil Company, Imad Sultan, said that the strategy is to secure the production of 60,000 barrels per day from the southern Ratqa field in the first phase. Production will be added to the heavy gas currently produced from the Umm Naqa field, which amounts to 15,000 barrels of heavy oil per day. This is in addition to the Kuwait Oil Company’s plans for new projects in western Kuwait, namely Umm Ras, Marwah, and al-Kabd.
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