The Strait’s disruption has intensified pressure on Kuwait’s Treasury, but recurring deficits and repeated efforts to expand financing capacity point to a deeper fiscal vulnerability that could outlast the war.
Kuwait’s decision to allow its General Reserve Fund to borrow from the Future Generations Fund gives the government another line of defence against a liquidity squeeze intensified by disruption to the Strait of Hormuz.
But the need for that mechanism predates the war.
Behind Kuwait’s immediate cash-flow shock lies a recurring Treasury-financing vulnerability — and beneath that, a structural fiscal imbalance that reopening Hormuz alone will not resolve.
Hormuz is the immediate shock
Kuwait remains heavily dependent on oil revenues and on the Strait of Hormuz as its principal export route. Disruption to shipping has therefore weakened the flow of export receipts into government finances.
Unlike a conventional geopolitical oil shock, higher crude prices provide only partial protection when physical export volumes are constrained.
Yet Kuwait is not facing a solvency crisis. S&P Global Ratings affirmed the sovereign at AA- in May, saying its large stock of liquid assets should help absorb the impact of the war and disruption to Hormuz. It nevertheless forecast a fiscal deficit of about 15% of GDP in the year ending March 2027, reflecting high expenditure and weaker production despite higher oil prices.
If shipping normalises, oil exports and Treasury receipts should recover. That makes the current Hormuz-driven liquidity pressure substantially cyclical.
The vulnerability underneath it is not.
Treasury pressure predates the war
Kuwait has confronted strains on its General Reserve Fund — the government’s principal fiscal buffer — before.
In 2020, the IMF warned that continued deficit financing had reduced the GRF’s liquid assets sharply. Without new financing sources, it projected that readily available reserves could be exhausted in less than two years even as Kuwait’s overall sovereign assets continued to grow. The Fund described dwindling GRF liquidity as a symptom of a weaker underlying fiscal position, rather than the core problem itself.
Kuwait has since progressively removed those financing constraints.
The Financing and Liquidity Law restored sovereign borrowing authority in 2025. In July this year, Kuwait raised another $6bn in international bonds, attracting more than $18bn of orders, demonstrating that access to the Future Generations Fund is not being opened because investors have stopped lending to the state.
Decree-Law No. 81 now adds another channel.
The General Reserve Fund can borrow from the Future Generations Fund, provided each loan specifies its purpose, return, tenor and repayment schedule. Annual borrowing cannot exceed the fund’s average realised returns over the previous five audited fiscal years, while accumulated outstanding loans are capped at 10% of audited net asset value.
On estimates placing FGF assets at roughly $1tn, EFG Hermes calculates that the 10% ceiling implies about $100bn of theoretical borrowing capacity, equivalent to roughly 63% of GDP. But that is not an immediately available credit line: the separate five-year-return limit could prove materially tighter.
The sequence is more revealing than the headline number.
Kuwait first relied on the GRF to absorb deficits. It then restored debt issuance. It has now authorised its long-term savings fund to become a creditor to the Treasury.
That points to a recurring financing vulnerability, not one created by Hormuz.
The deeper problem is structural
Kuwait entered the current crisis with a large deficit already embedded in its budget.
The government projected a KD9.8bn deficit for FY 2026/27, against KD16.3bn of revenue and KD26.1bn of expenditure. Salaries and subsidies account for 76% of planned spending, while oil revenues remain the dominant source of state income.
The IMF had reached a similar conclusion before the present conflict transformed the outlook.
Its February baseline projected the budgetary central-government deficit at 8.7% of GDP in FY 2025/26 and 9.4% in FY 2026/27, widening further under existing policies. It estimated Kuwait would need fiscal consolidation of about 1% of GDP annually for a decade, including reforms to public-sector wages, energy subsidies and non-oil revenues.
That distinction is central.
Hormuz affects how quickly Kuwait converts oil into cash. The fiscal model determines how much cash the government repeatedly needs.
Reopening the Strait can restore exports and ease Treasury pressure. It cannot by itself remove a budget structure dominated by wages and subsidies or Kuwait’s continuing dependence on hydrocarbons.
Reform — or easier deficit financing?
Decree 81 nevertheless addresses a genuine weakness in Kuwait’s sovereign balance sheet.
For years, the state could hold enormous long-term financial assets in the Future Generations Fund while its operating Treasury faced much tighter financing constraints. Allowing the FGF to lend to the GRF creates a more flexible internal sovereign-liquidity mechanism without authorising an outright drawdown of future-generations savings.
The loans remain assets of the FGF, earn a specified return and must be repaid, with repayment given priority once the state records a surplus.
That makes the reform potentially sound asset-liability management.
But it also carries a policy risk.
Improving the way Kuwait finances its deficit is not the same as reducing that deficit.
The real test will therefore come after Hormuz.
If normal exports return, GRF liquidity rebuilds and borrowing from the FGF remains limited before being repaid from subsequent surpluses, Decree 81 will have operated as a sovereign shock absorber.
If the Treasury continues using the FGF to finance recurrent expenditure after the external disruption has passed, the mechanism will have assumed a different role: a temporary liquidity bridge will be becoming part of Kuwait’s permanent fiscal architecture.
Loan pricing will offer another test. Financing that reflects the FGF’s investment opportunity cost would help preserve intergenerational value. Systematically cheaper loans could instead shift part of the economic cost of today’s expenditure towards future Kuwaitis.
Hormuz has therefore exposed three distinct weaknesses: a temporary export shock, a recurring Treasury-financing vulnerability and a structural fiscal imbalance.
Only the first disappears when the Strait reopens.
Kuwait has ample wealth to finance the state. The harder question is whether easier access to that wealth gives policymakers time to reform the fiscal model — or makes reform easier to postpone.
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