Kuwait's Oil Curse
In today's Finshots we talk about Kuwait, a future without oil and an intergenerational fund that might be the last saving grace for a country that's quickly running out of cash.
The Story
Kuwait first found oil in 1938. They became an independent country in 1953 and their oil reserves managed to catapult the country’s economy into the big leagues soon enough. But everybody knows that oil is a scarce resource. One day you are bound to run out of it and when that happens you could be in a spot of bother. When will it actually happen?
Short Answer — We don’t know.
Long answer — As we wrote in one of our previous articles…
There is an active campaign worldwide urging people to move away from fossil fuels. Climate Change is real. Global Warming is slowly eating away at coastlines. People can’t breathe in Delhi. So how can anyone in good conscience continue to use oil unabated? Well, they can’t. And many are having second thoughts now.
Also, as time progresses, these doubts will slowly morph into active principles. “Go green” will eventually become a lifestyle choice. And even if it doesn't, digging for oil in deep reservoirs will get so expensive that it won’t be worth digging at all. People will seek other low-cost alternatives. Maybe oil will become too expensive then. Maybe it will just price itself out of the market. As Sheik Ahmed Zahi Yamani, the longtime Saudi oil minister, once said, “The stone age came to an end, not for lack of stones, and the oil age will end, but not for lack of oil.”
It’s our favourite quote of all time.
Kuwait, meanwhile, has been preparing for this eventuality since 1976. And their plan was to set up a nest egg for the future. A rainy day fund of sorts for their children and their grandchildren. It was meant for those who will have to live a life without oil. As the Kuwaiti Investment Authority notes in its website —
Established by Amiri Decree in 1976, the Future Generations Fund (FGF) is the flagship investment fund. It is set up as an intergenerational savings platform… [and] consists of investments outside Kuwait based on an approved Strategic Asset Allocation in various asset classes ranging from more traditional assets such as equities and bonds to alternatives such as private equity, real estate and infrastructure.
And each year they allocate 10% of the state’s revenue to this fund. As a result, it has swelled up to about $600 billion. Where have they invested this money? We don’t know yet. But here’s where things get interesting. Kuwait has hit a rough patch recently. Oil prices have been on the decline. Government spending is on the rise. State income isn’t exactly booming. And Covid related expenses have further dented the country’s financials. Right now, Kuwait is spending more than it earns and as an article from Bloomberg notes — They’ve been desperately trying to bridge this deficit.
Now any rational individual would look at this and ask the government to prune spending. After all, if you can cut the excess, maybe you won’t have a deficit in the first place. However, that kind of attitude can be extremely unpopular with the public, especially when they suspect state officials of having mismanaged the country’s financials. More importantly, people used to freebies will want freebies in perpetuity. So the onus has been on the government to find other avenues. They could borrow from outside markets, but lawmakers have been sceptical of such a program. And that leaves us with the nest egg — the Future Generations Fund.
Now bear in mind, the government can’t dip into this fund unless sanctioned by law. However, they can do something else. The Investment Authority can choose to invest in Kuwait’s public sector companies if they want to. And rumour has it that they’ve been doing this in a bid to transfer some of the wealth from the fund to the government’s treasury. Unfortunately, the government is quickly running out of assets to sell. And that means they are running out of options in tandem. To put it simply—Kuwait created a fund for a future without oil. But in almost ironical fashion, their dependency on oil is now forcing them to dip into this kitty, well before it was intended to be used.
What a story, eh?
Until next time...