Kuwaits Anticipated Liquidity Law Expected To Boost DCM And Sukuk Growth

Despite the absence of a public debt law that would enable sovereign borrowing, Kuwaiti issuers were the Gulf Cooperation Council’s (GCC) third-largest US dollar debt issuers in 2024.

The government is aiming to pass a liquidity/debt law that would enable the sovereign to raise new debt, which could help develop markets for Kuwaiti issuers. The global ratings agency expects that the law will be passed in the fiscal year ending March 2026 (FY25). The draft liquidity law is under discussion with the Council of Ministers.

Dollar issuance by the sovereign has not occurred since 2017, prior to the expiry of the previous debt law. However, dollar issuance by Kuwaiti issuers surged to $13.6 billion in 2024 (from $60 million in 2023), driven mainly by banks.

Kuwait’s DCM outlook

DCM issuance in 2024 was $38.5 billion (all currencies), up 29 per cent year-on-year. Sukuk issuance rose by 660 per cent to $2.5 billion, while bond issuances rose by 22 per cent to $35.9 billion. Islamic banks, which hold nearly 50 per cent share of sector assets in Kuwait, are key sukuk investors and issuers.

The Sukuk share of the State’s DCM outstanding rose to 27 per cent by the end of January 2025, as against 20 per cent at the end of January 2024.

Fitch rated over $3 billion of Kuwaiti sukuk at end-2024, with 80 per cent rated ‘A’ and 20 per cent rated ‘BBB+’. All issuers are financial institutions on Stable Outlooks, and none of the Fitch-rated Kuwaiti sukuk or bond defaulted in 2024.

Fitch has assumed in its FY25 forecast that the government will resume borrowing, which will finance about 30 per cent of the deficit. Gross government debt/GDP remains low, at an estimated 2.9 per cent in FY24. If the liquidity law comes into effect in FY25, along with projected deficits and lower oil prices, Fitch forecast government debt/GDP to rise to 6 per cent in FY25 and 9.2 per cent in FY26.

Even without a liquidity law, the government would still be able to meet its financing obligations in the coming years, given the substantial assets at its disposal. Fitch affirmed the country’s issuers defaul rating at ‘AA-‘/Stable on 7 March 2025.

As of January 2025, about 74 per cent of the Kuwaiti DCM outstanding was in dollars, and the remaining 26 per cent in Kuwaiti dinars. Around 30 per cent of the DCM outstanding will mature during 2025, 6 per cent in 2026, and the rest in 2027 and beyond. ESG debt reached US$1 billion outstanding, with 50 per cent in Sukuk. Government bonds and central bank bills represent nearly 30 per cent of the DCM outstanding.

Reclassification effect

The country has been reclassified as a developed market by JP Morgan and will no longer be eligible for its emerging market sovereign bond indices. The reclassification could initially decrease passive investment flows from emerging markets-focused index-tracking investors to Kuwait. However, it could offer an opportunity for dedicated developed market investors.

The reclassification is based on Kuwait exceeding emerging market index thresholds, measured by gross national income per capita and cost of living metrics, for three consecutive years. Kuwait has maintained a credit rating of at least ‘A-’ throughout this period, as reflected by Fitch’s ‘AA-’ rating. The country will exit the Emerging Market Bond Indices over a phased six-month transition period.

Fitch said Kuwaiti DCM faced challenges, including a lack of sovereign and corporate DCM activity, a dearth of dinar issuance, a funding culture geared towards banks, and an investor base concentrated within banks.