The State of Kuwait
Federation of Euro-Asian Stock Exchanges
Economic Development and Outlook
72
Despite the drag from OPEC-led oil output cuts, growth recovered in 2018, rising to 1.2% following a 3.5% contraction in 2017. The improvement continued in the first quarter 2019, with the economy expanding by 2.6% year on-year (y/y) amid strong non-oil growth (of 4.1% y/y). High frequency indicators suggest that consumer spending improved in the first half of 2019, helped by strong public sector hiring, in turn supporting service sector activity. Notwithstanding broadly flat oil output, oil sector GDP rose 1.3% y/y in Q1, likely reflecting growth in refining output. Kuwait is the fifth largest OPEC oil producer, and oil production averaged 2.69mbd in the first half of 2019 versus an OPEC+ mandated target of 2.72mbd: in July, OPEC+ supply cuts were extended for another nine months until end-March 2020. Credit growth is recovering, reflected in rising lending to the consumer, business and real estate sectors. The banking sector remains the main intermediary of oil revenues to the domestic economy, and at 18.4%, bank capital adequacy ratios are above the central bank’s required 13%. Capital market reforms have led to the upgrade of Kuwait to emerging market status by FTSE, S&P Dow Jones and, in 2020, by MSCI, boosting investor confidence and triggering capital inflows. As of mid-August, the Kuwaiti stock market was up nearly 20% on year-to-date basis, significantly outperforming GCC peers. Inflation has been subdued at around 1% due to declining housing costs and weak food price growth. The central bank has tightened monetary policy more slowly than the US Fed, raising rates only four of the nine times that the Fed hiked rates since 2015. Most recently in July, it kept rates unchanged following a 25bp cut by the Fed. Higher oil prices during 2018 contributed to a narrowing of the fiscal deficit (excluding investment income and before oil revenue transfers to the Future Generations Fund) to 3% of GDP in FY18/19. The FY19/20 budget projects a 3% increase in government spending (over last year’s outturns), and a deficit target of about KD6.7 billion. However, as in past years, actual outturns should be considerably better given conservative oil price assumptions and a tendency to under spend on capital projects. Fiscal reforms have been slow; the implementation of the VAT has been postponed until 2021. Assets estimated at close to US$600 billion in Kuwait’s SWF exemplify the reliance on financial assets to save oil rents. In the past, deficits have been financed by a mix of draw downs from the General Reserve Fund and debt issuance. However, following the issuance of a maiden US$8 billion bond in 2017, further debt issuance in international markets has been constrained by delays in Parliament’s approval of new legislation to raise the government’s borrowing limit. Higher oil prices have boosted export receipts and the current account (CA) surplus to 19.5% of GDP in Q1 (versus 15% in 2018), led by a rising income balance (reflecting higher investment income and declining remittance outflows) alongside a significant trade surplus. Kuwait is an oil-rich country, where absolute poverty and involuntary unemployment are virtually nonexistent. 50% of employed Kuwaiti nationals work in the public sector. In contrast, migrants, who make up two-thirds of the population, constitute the bulk of lowerincome residents. Additional concerns for migrant workers include unpaid or delayed wages, difficult working conditions and fear of a crackdown. About 18% of the total population lives on less than half the median income level—this number is 1.5% for Kuwaiti nationals and 34% for others.