DUBAI - Steps taken by the Kuwaiti government to mitigate depletion of the treasury's liquid assets could push back the risk of a liquidity crunch to the third quarter this year, Bank of America estimates.

Kuwait's General Reserve Fund (GRF), the sovereign fund used to cover state deficits, has been squeezed by the coronavirus-driven drop in oil prices and a continued stand-off between government and parliament on implementing measures such as a law to allowing state borrowing.

The fund raised about 6 billion to 7 billion dinars ($19.87 billion to $23.19 billion) in recent months through asset swaps with Kuwait's Future Generations Fund (FGF) - a nest egg for when the country's oil runs out - and thanks to money returned to the GRF after a law last year halted a mandatory annual transfer of 10% of state revenue to FGF.

"Authorities have taken steps to mitigate the depletion of the liquid assets in the GRF. We estimate this lengthened the timeline for depletion of GRF liquidity until 3Q21," BofA said in a report dated March 17.

"Clawback of accrued dividends from government entities could lengthen this timeline further."

The GRF is negotiating with state-owned Kuwait Petroleum Corporation on a new payment schedule for more than $20 billion in accrued dividends, sources told Reuters this month.

While such negotiations could boost GRF liquidity, the transfers are likely to occur over a relatively long timeframe rather than on up front, said BofA.

"Authorities may also approach other government entities for similar transfers, in our view," the bank added.

Ratings agency Fitch last month downgraded its outlook on Kuwait's sovereign debt rating to "negative" from "stable".

"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. ($1 = 0.3019 Kuwaiti dinars)

(Reporting by Davide Barbuscia Editing by David Goodman) ((; +971522604297; Reuters Messaging: