Kuwait Currency Peg in Spotlight With State Unable to Borrow

[Wheelman]

Bloomberg) -- The Kuwaiti dinar’s peg to a basket of currencies is coming under scrutiny as concerns grow that one of the world’s richest nations is running short of cash.

Derivatives are showing signs of pressure after 12-month forward contracts on the Kuwaiti dinar rose to about 305 points in the offshore market Thursday, the highest since the oil rout in March. Most other Gulf currency forwards have declined this year as the recent recovery in crude prices eases the risks to their energy-dependent economies.

While other Gulf Arab states tapped global debt markets to bolster strained finances amid the pandemic, Kuwait has been hamstrung by lawmakers’ resistance to approve a law that would enable the government to borrow. Concern over how Kuwait will cover its budget deficit has become more acute after the government transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash.

 

 

[Mary B]

Kuwait Currency Peg in Spotlight With State Unable to Borrow

By 

Netty Idayu Ismail

 and 

Fiona MacDonald

February 10, 2021, 10:00 PM CST Updated on February 11, 2021, 3:58 AM CST

•  
  12-month forward contracts for dinar hit highest since March
•  
  Fitch cut Kuwait outlook to negative, citing ‘liquidity risk’

 

The Kuwaiti dinar’s peg to a basket of currencies is coming under scrutiny as concerns grow that one of the world’s richest nations is running short of cash.

 

 

Derivatives are showing signs of pressure after 12-month forward contracts on the Kuwaiti dinar rose to about 305 points in the offshore market Thursday, the highest since the oil rout in March. Most other Gulf currency forwards have declined this year as the recent recovery in crude prices eases the risks to their energy-dependent economies.

 

While other Gulf Arab states tapped global debt markets to bolster strained finances amid the pandemic, Kuwait has been hamstrung by lawmakers’ resistance to approve a law that would enable the government to borrow. Concern over how Kuwait will cover its budget deficit has become more acute after the government transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash.

 

 

Ultimately, analysts and investors say the government will be forced to act to shore up the nation’s finances, whether by breaking the borrowing deadlock or imposing taxes to increase revenue. As a last resort, the dinar could be devalued, but it’s not clear how effective that would be in terms of bolstering the economy, they say.

 

 

“Risks of devaluation are limited,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd., which holds Kuwait’s sovereign, corporate and bank debt. The country could tap capital markets some time in the first half of 2021, he said.

“I expect the necessary reforms to be passed as the available options such as monetizing sovereign wealth fund assets are limited.”

Fitch Ratings predicted the government would replenish its General Reserve Fund -- the main source of budget financing -- even without any new legislation by parliament. At the same time, it cut the outlook on Kuwait’s debt rating to negative from stable last week to reflect “near-term liquidity risk.”

Wider Spreads

That move contributed to a drop in the nation’s Eurobonds, sending the spread on $3.5 billion of sovereign debt due March 2022 to the widest since November. The country hasn’t tapped global debt markets since 2017 and the bonds’ scarcity value normally keeps prices stable.

In 2007, Kuwait became the first Gulf Arab state to abandon its currency peg to the dollar in favor of a basket, reacting to a decline in the U.S. currency that had pushed up the cost of imports, fueling inflation.

“I’m not aware of anyone speculating or hedging their Kuwaiti dinar exposure, though I wouldn’t be surprised if a hedge fund somewhere thinks it’s a trade,” said Ali Al-Salim, a Gulf-based co-founder of Arkan Partners, a consulting company for alternative investments including hedge funds and private equity.

According to Al-Salim, the central bank’s latest disclosures suggest its foreign-asset position remains stable.

“Kuwait’s economic challenges can’t be resolved via its currency alone,” he said. “It has a very narrow economy dominated by oil revenues, and expenses that are almost entirely imports. A weaker currency would create limited incremental demand for locally produced goods and services.”

https://www.bloomberg.com/news/articles/2021-02-11/kuwait-currency-peg-in-spotlight-with-nation-unable-to-borrow

[NEPatriotsFan1]

5 hours ago, Mary B said:

Kuwait Currency Peg in Spotlight With State Unable to Borrow

By 

Netty Idayu Ismail

 and 

Fiona MacDonald

February 10, 2021, 10:00 PM CST Updated on February 11, 2021, 3:58 AM CST

•  
  12-month forward contracts for dinar hit highest since March
•  
  Fitch cut Kuwait outlook to negative, citing ‘liquidity risk’

 

The Kuwaiti dinar’s peg to a basket of currencies is coming under scrutiny as concerns grow that one of the world’s richest nations is running short of cash.

 

 

Derivatives are showing signs of pressure after 12-month forward contracts on the Kuwaiti dinar rose to about 305 points in the offshore market Thursday, the highest since the oil rout in March. Most other Gulf currency forwards have declined this year as the recent recovery in crude prices eases the risks to their energy-dependent economies.

 

While other Gulf Arab states tapped global debt markets to bolster strained finances amid the pandemic, Kuwait has been hamstrung by lawmakers’ resistance to approve a law that would enable the government to borrow. Concern over how Kuwait will cover its budget deficit has become more acute after the government transferred the last of its performing assets to the country’s sovereign wealth fund in exchange for cash.

 

 

Ultimately, analysts and investors say the government will be forced to act to shore up the nation’s finances, whether by breaking the borrowing deadlock or imposing taxes to increase revenue. As a last resort, the dinar could be devalued, but it’s not clear how effective that would be in terms of bolstering the economy, they say.

 

 

“Risks of devaluation are limited,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd., which holds Kuwait’s sovereign, corporate and bank debt. The country could tap capital markets some time in the first half of 2021, he said.

“I expect the necessary reforms to be passed as the available options such as monetizing sovereign wealth fund assets are limited.”

Fitch Ratings predicted the government would replenish its General Reserve Fund -- the main source of budget financing -- even without any new legislation by parliament. At the same time, it cut the outlook on Kuwait’s debt rating to negative from stable last week to reflect “near-term liquidity risk.”

Wider Spreads

That move contributed to a drop in the nation’s Eurobonds, sending the spread on $3.5 billion of sovereign debt due March 2022 to the widest since November. The country hasn’t tapped global debt markets since 2017 and the bonds’ scarcity value normally keeps prices stable.

In 2007, Kuwait became the first Gulf Arab state to abandon its currency peg to the dollar in favor of a basket, reacting to a decline in the U.S. currency that had pushed up the cost of imports, fueling inflation.

“I’m not aware of anyone speculating or hedging their Kuwaiti dinar exposure, though I wouldn’t be surprised if a hedge fund somewhere thinks it’s a trade,” said Ali Al-Salim, a Gulf-based co-founder of Arkan Partners, a consulting company for alternative investments including hedge funds and private equity.

According to Al-Salim, the central bank’s latest disclosures suggest its foreign-asset position remains stable.

“Kuwait’s economic challenges can’t be resolved via its currency alone,” he said. “It has a very narrow economy dominated by oil revenues, and expenses that are almost entirely imports. A weaker currency would create limited incremental demand for locally produced goods and services.”

https://www.bloomberg.com/news/articles/2021-02-11/kuwait-currency-peg-in-spotlight-with-nation-unable-to-borrow

How about ya’ll meet the Iraqi Dinar somewhere in the middle say $2.65 heck I’ll take $1.41 even, would be easier to trade with your neighbors too  

[Dinarrock]

Absolutely $2.65 was the actual internationally recognized rate back in the day it wasn’t the $3.22 rate that most people think that was a Saddam Hussein imposed rate!! I will take $2.65 which will take them back to their glory days and I will be the first in line at the bank!! Come on RV!!!

[southbeach]

Iraqs outstanding Kuwaiti debt can somehow be resolved right here plus help Kuwait

[yota691]

Will Kuwait Devalue Its Currency To Meet The Liquidity Shortage?

On February 11, 2021

 

The Independent / - Kuwait suffers from a severe shortage of liquidity, due to the spread of the Corona virus and the decline in global oil prices.

 

 

While other Gulf Arab states have resorted to global debt markets to bolster declining financial resources amid the outbreak of the Corona epidemic, Kuwait has faced resistance from representatives of the National Assembly (Parliament) to approve a bill that would enable the government to borrow.

 

Concern is increasing over how Kuwait will fill the budget deficit, after the government transferred its last productive assets to its sovereign fund in exchange for liquidity.

 

 

Ultimately, analysts and investors say, the Kuwaiti government will have to act to shore up the country's finances, whether by overcoming the borrowing impasse or imposing taxes to increase revenues.

As a last resort, the Kuwaiti government can reduce the value of the dinar, but it is not clear how effective it will be in terms of boosting the economy, according to what was reported by analysts and investors.

"The risks of devaluation (the dinar) are limited," said Todd Schubert, head of fixed income research at Bank of Singapore Limited, which holds the sovereign debt of Kuwait, companies and banks.

 

He added that Kuwait could resort to financial markets during the first half of 2021, expecting the necessary reforms to pass, because the available options, such as liquidating the assets of the sovereign fund are limited.

In 2007, Kuwait became the first Arab Gulf state to abandon its peg to the dollar in exchange for a basket of currencies, to cope with the depreciation of the US currency, which led to an increase in the cost of imports, and thus fueled inflationary pressures.

[DinarThug]

Will Kuwait devalue its currency to meet the liquidity shortage?

Posted 12 hours ago

Independent Press Agency

 

The Independent / - Kuwait suffers from a severe shortage of liquidity, due to the spread of the Corona virus and the decline in global oil prices.

 

While other Gulf Arab states have resorted to global debt markets to bolster declining financial resources amid the outbreak of the Corona epidemic, Kuwait has faced resistance from representatives of the National Assembly (parliament) to approve a bill that would enable the government to borrow.

 

Concern is increasing about how Kuwait will fill the budget deficit, after the government transferred its last productive assets to its sovereign wealth fund in exchange for liquidity.

 

Ultimately, analysts and investors say, the Kuwaiti government will have to act to shore up the country's finances, whether by overcoming the borrowing impasse or imposing taxes to increase revenues.

As a last resort, the Kuwaiti government can reduce the value of the dinar, but it is not clear how effective it will be in terms of boosting the economy, according to what was reported by analysts and investors.

"The risks of devaluation (the dinar) are limited," said Todd Schubert, head of fixed income research at Bank of Singapore Limited, which holds the sovereign debt of Kuwait, companies and banks.

 

He added that Kuwait could resort to financial markets during the first half of 2021, expecting the necessary reforms to pass, because the available options, such as liquidating the assets of the sovereign fund, are limited.

In 2007, Kuwait became the first Arab Gulf state to abandon its peg to the dollar in exchange for a basket of currencies, in order to cope with the depreciation of the US currency, which led to an increase in the cost of imports, thus feeding inflationary pressures.

The post Will Kuwait devalue its currency to face the liquidity shortage? appeared first on Independent Press Agency.

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