|18 October, 2018

Kuwait economic outlook: Late to the party?

Rising oil price may dampen appetite for economic reforms, say analysts

Image used for illustrative purpose. Kuwait, elevated view of the modern city skyline and central business district.

Image used for illustrative purpose. Kuwait, elevated view of the modern city skyline and central business district.

Getty Images/Gavin Hellier

Back in 2009, two oil downturns ago, the International Monetary Fund was pushing Kuwait to diversify its economy and explaining why fiscal reform was key “to reducing the dependence on oil revenue and preserving long-term sustainability” for the country.

But Kuwait’s economy remains stubbornly dependent on crude oil revenues. While non-oil income, excluding investments, stood at 2.92 percent of total GDP in 2008, that figure has estimated to have inched higher to 3.6 percent in 2018, according to the IMF’s most recent estimate, when it issued a report containing yet another warning that reform implementation was one of “the main risks” to the country’s economic outlook.

While most Gulf states have been in a hurry to retool their economies in the aftermath of the 2014 oil price downturn, announcing a spate of new measures and blueprints for diversification, Kuwait has not been as ruffled by the mantra of “lower-for-longer” oil prices.

And with oil prices once again rising above $80 per barrel – with $100 per barrel back in sight - Kuwait’s window of carving out non-oil income revenues may be closing, according to an analyst.

“Yes, I think the window has narrowed considerably,” Axel Dalman, MENA country risk analyst at Fitch Solutions, told Zawya.

The paradox is that although it is the sole GCC state with elected members, they sit in a fractious parliament. Building consensus for reform was difficult even during the oil price slump, when economic pressures were much stronger than they are now, Dalman says.

Kuwaiti MPs have resisted efforts to implement politically unpopular but necessary measures such as value added tax, which was rolled out in Saudi Arabia and the UAE earlier this year.

“I think the government still retains a willingness to enact some reforms, at least with regards to the country's business environment, but their capacity to attempt contentious reforms like the adoption of a value-added tax is only going to decrease with higher oil prices,” Dalman said.

Kuwaiti MPs have also been fierce in their opposition to open up the economy, including foreign investments in a market with oil reserves of 104 billion barrels – the world’s sixth-largest concentration of oil.

The country’s budget for its current financial year ending in March allocates 70 percent of expenditure on wages and subsidies, with only 18 percent earmarked for development projects. The budget projects a deficit of KD6.5 billion, or $21.6 billion, but was set with a conservative revenue forecast of oil at $50 per barrel.

“I think Kuwait’s delay of the reform is a mistake in the sense that it dims the outlook for more important reforms,” Dalman said.

Sure, oil has been a boon for Kuwaitis who enjoy GDP per capita of US$29,800 and a cradle-to-grave social welfare system. The Kuwait Investment Fund, the fiscal cushion that has assets of well over $592 billion, shields a native population of around 1.4 million.

Big buffers

“Kuwait has comparatively large fiscal buffers accumulated over the years, which places it in a more comfortable position among GCC peers,” says Raghu Mandagolathur, head of research at Kuwait Financial Center, or Markaz.

The government has made some efforts to cut back spending by liberalising fuel prices and scrapping subsidies in the last few years, but more serious reforms have faced strong opposition.

“The cabinet has frequently faced resistance from the citizens and the parliament against the austerity measures, which to an extent has slowed down the reforms,” Mandagolathur said in an emailed response.

Like most Gulf nations, Kuwait has unveiled a ‘Vision” programme for 2035 that aims to encourage private sector growth, nurture small-to-medium enterprises, build more tourism attractions, and attract investments in manufacturing and industrial hubs.

But there is a feeling that it is late to the party. The UAE, Saudi Arabia and Oman are much further ahead in the development of tourism, and Oman is emerging as an industrial logistics hub thanks to its advantageous location overlooking the Indian Ocean. Qatar, for all of its troubles with its Gulf neighbours, remains an enterprising economy with long-term export deals for its natural gas.

Staying the course has its advantages. Kuwait has withstood the last two oil price downturns of 2008-10 and 2014-17 without any major erosion of its fiscal standing, and enjoys breakeven oil prices of $48.10 per barrel for this year, among the lowest in the region, according to an IMF forecast in May.

The National Bank of Kuwait, the country’s largest bank by assets, expects GDP to rise 2.6 percent this year and 3 percent next year, assuming oil prices average $69 per barrel this year and $67 next year.

Meanwhile, credit growth has been steadily rising this year, while real estate sales hit a record US$500 million in July, but then dropped by 13 percent month-on-month to $435 million in August – the lowest monthly figure since September 2016.

Record inflows

Kuwait’s stockmarket also saw record amounts of buying from foreign investors in September as index compiler FTSE Russell upgraded some of the country’s biggest stocks from Frontier to Secondary Emerging Market indices. NBK’s report said a possible inclusion into rival compiler MSCI’s Emerging Market index next year could lead to passive inflows of up to $1.2 billion into Kuwaiti stocks if it decides on an upgrade next year

The government has also made progress on new projects, including the 4.87 billion dinar Al-Zour Refinery, which is 55 percent complete, according to data from the government’s New Kuwait Plan, while a 4.68 billion dinar clean fuel project aimed at boosting capacity at refineries in Al Ahmadi and Abdullah ports is around 85 percent complete.

More fanciful projects such as the Silk City project and other islands developments that are expected to create 200,000 jobs and $35 billion in annual revenue remain blueprints.

Markaz’s Mandagolathur said the government could invest in downstream development, which would also create opportunities in a range of supporting sectors.

“Rather than just upstream and midstream, oil and oil industry should be extended downstream towards petrochemicals, which is a feedstock for all the other industry,” Mandagolathur said.

Rachel Ziemba, of Ziemba Insights, believes there is still time for Kuwait to kick its oil habit and channel its sizeable financial resources and new revenue effectively.

“While it’s always harder to reform when times are good, it’s critical given the population trends and regional competition,” said Ziemba in an emailed response.

But with oil once again reaching heady levels, there are concerns that fiscal cushions would allow the authorities to kick the reform can down the road.

“Kuwait could muddle through but that would put an increased burden on the public sector for employment etc. and leave it vulnerable in the case of fuel price volatility,” said Ziemba, noting the country’s sizeable savings and investment fund.

“It’s not at risk of an economic or debt crisis like Bahrain or even Oman where issues have developed more slowly but the quality of growth is important so it doesn’t get left behind.”

If things don’t pick up, the danger is that instead of being late to the party, Kuwait could end up missing it altogether.

(Reporting by Syed Hussain; Editing by Michael Fahy)

(Michael.fahy@refinitiv.com)

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