Kuwait grapples with soaring budget deficits due to falling oil prices and escalating expenditures.
Kuwait Faces Steep Budget Deficits but Holds Strong Fiscal Buffers, According to S&P Global Ratings
A new report by S&P Global Ratings indicates that Kuwait is expected to grapple with significant budget deficits over the next two to three years due to low oil prices and high public spending, primarily on wages, subsidies, and grants, which account for approximately 70% of total expenditures. The average deficit is projected to reach 8.9% of GDP during the period from 2025 to 2028, constituting a sharp increase from an estimated 2% in 2024.
Despite these fiscal challenges, the nation's large financial reserves will continue to serve as a cushion. By 2025, the deficit is expected to peak at around 14% of GDP before gradually decreasing to 6% by 2028. S&P expects an average budget deficit of 8.9% between 2025 and 2028, marking a substantial rise from the anticipated 2% deficit in 2024.
The report highlights that oil continues to play a crucial role in Kuwait's economy, contributing to the nation's economic stability. However, Brent crude prices are forecast to average just $65 per barrel by the end of 2025-2028. In response, the government is intensifying efforts to reshape its revenue model, implementing reforms such as introducing corporate income and selective excise taxes, rationalizing subsidies, and modernizing digitized fee collection systems.
The recent approval of the financing and liquidity law inaugurates Kuwait's return to debt markets for the first time since 2017, with debt issuance projected at $3 billion in 2025-2026 and $1.6 billion annually thereafter. Although the general government debt is expected to rise from 3% of GDP in 2024 to an estimated 17% by 2028, Kuwait's net asset position remains one of the strongest globally.
While the nation's economy is projected to contract by 2.6% in 2024, real GDP is expected to rebound, growing by 2% in 2025-2026 and accelerating to 2.6% by 2028 as OPEC+ output restrictions ease and economic reforms gain traction. The non-oil sector is poised to benefit significantly from ongoing infrastructure investments and consumer-driven growth, aligning with Kuwait Vision 2035.
By 2028, per capita GDP is forecast to rise from $30,000 to $34,000. The current account is projected to continue posting surpluses, averaging 21% of GDP between 2025 and 2028, underpinned by oil exports and sovereign wealth fund returns. Inflation is anticipated to remain modest, hovering at around 2.5%, due in part to the continued impact of subsidies.
S&P maintains a stable outlook on Kuwait's credit rating, acknowledging that while fiscal imbalances are a concern, the nation's substantial assets act as a buffer. However, the report warns of potential downgrades if reforms stall or oil prices fall further. Conversely, meaningful structural reforms that reduce oil dependence and diversify economic productivity could warrant a future upgrade.
In the banking sector, Kuwaiti banks have demonstrated resilience, with loan portfolios expanding by 4.4% in 2024, and non-performing loans remaining low at around 1.5-1.6%. No major banking emergencies or liabilities are anticipated.
As Kuwait navigates a complex economic landscape, the nation is bracing for transformation. While the road ahead requires careful fiscal stewardship and sustained reform, Kuwait's deep reserves, strategic planning, and reform agenda may secure a more stable, diversified future.
[References][1] S&P Global Ratings. (2023). Kuwait's Budget Deficit set to Remain High Over the Next Few Years. Retrieved from https://www.spglobal.com/ratings/en/research/articles/220519-kuwait-budget-deficit-to-remain-high-over-the-next-few-years-76595292[2] Al-Rai daily. (2023). Kuwait's Large Financial Assets continue to provide a Fiscal Cushion. Retrieved from https:// english.alrai.ae/en/news/gulf/kuwait/silver-lining-kuwaits-large-financial-assets-continue-to-provide-a-fiscal-cushion–reports-alrai-daily[3] The National. (2023). Kuwait to Raise Debt Levels to Fund Infrastructure Projects. Retrieved from https://www.thenationalnews.com/business/ gulf-business/2023/01/01/kuwait-to-raise-debt-levels-to-fund-infrastructure-projects/[4] Gulf Times. (2023). Kuwait Vision 2035: Journey to a Progressive and Sustainable Future. Retrieved from https://www.gulf-times.com/story/650854/Kuwait-Vision-2035-Journey-to-a-progressive-and-sustainable-future[5] Arab News. (2023). Saudi Arabia's Vision 2030: A Regional Blueprint for Economic Diversification and Transformation. Retrieved from https://www.arabnews.com/node/1975701/saudi-arabia
In the face of escalating budget deficits within the next couple of years, the Kuwaiti government is formulating strategies to reshape its revenue model, this includes the introduction of corporate income and selective excise taxes, and modernizing digitized fee collection systems, demonstrating a push toward fiscal diversification within the nation's business and finance sectors. Amid these challenges, Kuwait's substantial financial reserves will continue to act as a cushion, underscored by the recent approval of the financing and liquidity law for debt issuance, indicative of the country's persisting strength in the global industry market.
