Rating agency Fitch said on Wednesday it downgraded the outlook on Kuwait's sovereign debt rating to "negative" from "stable", saying it saw near-term liquidity risks associated with the state treasury fund.

Fitch affirmed Kuwait's long-term rating at "AA".

The rating agency said the outlook change reflects near-term liquidity risk associated with the imminent depletion of liquid assets in the General Reserve Fund (GRF) in the absence of parliamentary authorisation for the government to borrow.

An OPEC member state, Kuwait has been hit hard by lower crude prices and the coronavirus pandemic.

Repeated rows and deadlocks between cabinet and the elected assembly have led to successive government reshuffles and dissolutions of parliament, hampering much needed economic reforms.

"Without passage of a law permitting new debt issuance, the GRF could run out of liquidity in the coming months without further measures to replenish it" Fitch said.

"Depletion of GRF liquidity would sharply limit the government's ability to make good on its spending obligations and could result in significant economic disruption."

The rating agency, however, said its base case is that government will replenish the GRF to avoid depletion even without any new legislation by parliament, and that debt servicing of 400 million Kuwaiti dinar ($1.32 billion) or 1% of GDP in 2021 would in any case continue in a timely manner.

Fitch said it expects the general government deficit to widen to about 6.7 billion dinars or 20% of GDP in FY20, including in revenue the estimated investment income of the sovereign wealth fund Kuwait Investment Authority.

Fiscal deficits will likely remain in the double digits in the medium to long term and lead to a gradual, but steady deterioration of Kuwait's balance sheet strengths, it said.

Fitch said Kuwait's economy will stage a mild economic recovery this year as the dual shocks of oil production cuts and the coronavirus begin to fade after the economy contracted by an estimated 7% in 2020.