PHOTO
02 August 2016
Pace of project implementation has picked up in the last two years
Kuwait's non-oil sector is expected to grow at a faster rate, as the government maintains capital spending on development projects as part of a drive to diversify the economy away from its dependence on hydrocarbons and increase private sector participation, according to National Bank of Kuwait (NBK).
The Gulf Arab oil producer has laid out an ambitious five-year development plan that forecasts total spending of 34.15 billion dinars ($112.9 billion) by 2020, including private investment, to carry out several mega projects including a railway, a metro, expansion of the country's airport and major real estate and oil projects.
"The government has made it clear that, in the current low oil price environment, the development plan is more important than ever. This is especially true in regards to the public-private partnership component of the plan which seeks to deepen the role of the private sector in the economy," Nemr Kanafani, head of banking and finance research at NBK, told Zawya.
Non-oil sector growth is forecast to rise to 4 percent in 2016 and 4.5 percent in 2017, compared with estimated growth of 3.5 percent in 2015, on the back of public investment and steady consumer demand, NBK said in its July 19 economic update.
Overall real gross domestic product (GDP) growth is forecast to reach 2.9 percent in 2016 and 3.3 percent in 2017, compared with estimated growth of 1.5 percent in 2015.
"The key components of our outlook for Kuwait are steady project implementation, a credible reform program to address medium term challenges including fiscal sustainability, plentiful buffers in the form of Kuwait's sovereign wealth fund and relatively low fiscal breakeven oil price," Kanafani said.
A government official said in remarks published in the Kuwait Times daily on Monday that 4.75 billion dinars would be invested in 2017-2018, of which 1.59 billion would be allocated from the state budget while the rest of the funds would come from the public sector, including the energy industry, and from private investors.
Khaled Mahdi, the secretary general of the Supreme Council for Planning and Development, was quoted as saying that the government sector was providing 49.33 percent of the financing for the five-year development plan, the oil sector was contributing 33.8 percent and the private sector 16.9 percent.
Projects revival
The pace of project implementation in Kuwait has picked up since 2013, with more than 7.5 billion dinars in projects awarded in 2014 and another 12 billion dinars in 2015, according to the NBK report, which said that the pace has been maintained this year with 2.2 billion in contracts awarded through May 2016.
Kuwait Times quoted Mahdi as saying that the development plan includes the Al Zour refinery project, due to be finished by December 2019, a clean fuel project slated for completion by April 2018, and the expansion of Kuwait International Airport, due to end in January 2022. Like other Gulf Arab oil producers, Kuwait is running a budget deficit but has limited spending cuts to non-essential expenditure and some subsidies allocations. The state needs oil prices at $60-65 a barrel to balance its budget -- well above the current levels of around $42 for Brent crude. NBK said the budget deficit was projected at 12 to 13 percent of GDP in the fiscal years 2015/16 and 2016/17, before narrowing to around 2.8 percent for 2017/18 as oil prices move higher.
"Kuwait's deficits are manageable. Substantial fiscal buffers, in the form of a sovereign wealth fund estimated at well over 400 percent of GDP, should ensure that Kuwait pulls through the lower oil price period relatively easily and without having to make deep spending cuts," the report said, adding that the government would rely on debt issuance and tapping into its liquid assets to finance part of the deficit.
No new taxes before 2019
Kuwait has already taken several measures to cope with the decline in oil receipts, which account for roughly 90 percent of state revenues, including reducing state spending on fuel subsidies, but the government has not moved to reduce wages and salaries, which account for a large percentage of state spending.
In a major reform to energy subsidies, Kuwait announced this week it will increase the prices of gasoline by as much as 73 percent from September, according to state news agency KUNA, joining other Gulf Arab states, such as the United Arab Emirates, who have made similar steps.
"We expect government reform will involve both rationalising spending and tapping new revenue sources... On the revenue side, a VAT (value-added tax) and a comprehensive corporate income tax form the key policies being pursued by the government," Kanafani said.
In March this year, Kuwait's cabinet approved a comprehensive 10 percent corporate income tax, which would replace an existing 15 percent tax imposed on non-GCC companies only. A VAT law, part of a Gulf Cooperation Council (GCC) proposal, is being discussed by member states.
The NBK report said new taxes are not expected to be launched by Kuwait before 2019 at the earliest.
Any slowdown in the execution of the government's reform agenda, whether due to prolonged weakness in oil prices or domestic political considerations, would pose an additional risk to the country's outlook.
"If (oil) prices are lower for longer, the government could be forced to implement deeper spending cuts, with negative consequences for growth as important projects are delayed or even canceled," Kanafani said. "This could have detrimental implications for growth prospects and sustainability in the medium term.
Kuwait has repeatedly faced political resistance of pushing through fiscal reforms, with some parliamentarians seeking populist measures. The new economic realities however demand that the government implements some austerity measures.
© Zawya 2016
Pace of project implementation has picked up in the last two years
Kuwait's non-oil sector is expected to grow at a faster rate, as the government maintains capital spending on development projects as part of a drive to diversify the economy away from its dependence on hydrocarbons and increase private sector participation, according to National Bank of Kuwait (NBK).
The Gulf Arab oil producer has laid out an ambitious five-year development plan that forecasts total spending of 34.15 billion dinars ($112.9 billion) by 2020, including private investment, to carry out several mega projects including a railway, a metro, expansion of the country's airport and major real estate and oil projects.
"The government has made it clear that, in the current low oil price environment, the development plan is more important than ever. This is especially true in regards to the public-private partnership component of the plan which seeks to deepen the role of the private sector in the economy," Nemr Kanafani, head of banking and finance research at NBK, told Zawya.
Non-oil sector growth is forecast to rise to 4 percent in 2016 and 4.5 percent in 2017, compared with estimated growth of 3.5 percent in 2015, on the back of public investment and steady consumer demand, NBK said in its July 19 economic update.
Overall real gross domestic product (GDP) growth is forecast to reach 2.9 percent in 2016 and 3.3 percent in 2017, compared with estimated growth of 1.5 percent in 2015.
"The key components of our outlook for Kuwait are steady project implementation, a credible reform program to address medium term challenges including fiscal sustainability, plentiful buffers in the form of Kuwait's sovereign wealth fund and relatively low fiscal breakeven oil price," Kanafani said.
A government official said in remarks published in the Kuwait Times daily on Monday that 4.75 billion dinars would be invested in 2017-2018, of which 1.59 billion would be allocated from the state budget while the rest of the funds would come from the public sector, including the energy industry, and from private investors.
Khaled Mahdi, the secretary general of the Supreme Council for Planning and Development, was quoted as saying that the government sector was providing 49.33 percent of the financing for the five-year development plan, the oil sector was contributing 33.8 percent and the private sector 16.9 percent.
Projects revival
The pace of project implementation in Kuwait has picked up since 2013, with more than 7.5 billion dinars in projects awarded in 2014 and another 12 billion dinars in 2015, according to the NBK report, which said that the pace has been maintained this year with 2.2 billion in contracts awarded through May 2016.
Kuwait Times quoted Mahdi as saying that the development plan includes the Al Zour refinery project, due to be finished by December 2019, a clean fuel project slated for completion by April 2018, and the expansion of Kuwait International Airport, due to end in January 2022. Like other Gulf Arab oil producers, Kuwait is running a budget deficit but has limited spending cuts to non-essential expenditure and some subsidies allocations. The state needs oil prices at $60-65 a barrel to balance its budget -- well above the current levels of around $42 for Brent crude. NBK said the budget deficit was projected at 12 to 13 percent of GDP in the fiscal years 2015/16 and 2016/17, before narrowing to around 2.8 percent for 2017/18 as oil prices move higher.
"Kuwait's deficits are manageable. Substantial fiscal buffers, in the form of a sovereign wealth fund estimated at well over 400 percent of GDP, should ensure that Kuwait pulls through the lower oil price period relatively easily and without having to make deep spending cuts," the report said, adding that the government would rely on debt issuance and tapping into its liquid assets to finance part of the deficit.
No new taxes before 2019
Kuwait has already taken several measures to cope with the decline in oil receipts, which account for roughly 90 percent of state revenues, including reducing state spending on fuel subsidies, but the government has not moved to reduce wages and salaries, which account for a large percentage of state spending.
In a major reform to energy subsidies, Kuwait announced this week it will increase the prices of gasoline by as much as 73 percent from September, according to state news agency KUNA, joining other Gulf Arab states, such as the United Arab Emirates, who have made similar steps.
"We expect government reform will involve both rationalising spending and tapping new revenue sources... On the revenue side, a VAT (value-added tax) and a comprehensive corporate income tax form the key policies being pursued by the government," Kanafani said.
In March this year, Kuwait's cabinet approved a comprehensive 10 percent corporate income tax, which would replace an existing 15 percent tax imposed on non-GCC companies only. A VAT law, part of a Gulf Cooperation Council (GCC) proposal, is being discussed by member states.
The NBK report said new taxes are not expected to be launched by Kuwait before 2019 at the earliest.
Any slowdown in the execution of the government's reform agenda, whether due to prolonged weakness in oil prices or domestic political considerations, would pose an additional risk to the country's outlook.
"If (oil) prices are lower for longer, the government could be forced to implement deeper spending cuts, with negative consequences for growth as important projects are delayed or even canceled," Kanafani said. "This could have detrimental implications for growth prospects and sustainability in the medium term.
Kuwait has repeatedly faced political resistance of pushing through fiscal reforms, with some parliamentarians seeking populist measures. The new economic realities however demand that the government implements some austerity measures.
© Zawya 2016
