Kuwait’s growth ambitions come under pressure

Published in MEED, 20 December 2016

After a decent performance in 2016, the difficulties for the economy look to be mounting once again

Kuwait’s economy grew more quickly in 2016 than in the previous three years, according to the IMF, with an estimated expansion of 2.5 per cent in GDP. But while the Washington-based organisation is predicting slightly faster growth in 2017, at 2.6 per cent, there are plenty of reasons to be cautious.

With oil prices still relatively low, the government is under pressure to press ahead with further austerity measures, but the election of a less cooperative National Assembly in November is likely to make that far harder to achieve – a large proportion of the new members of parliament campaigned on a platform opposing the reform measures.

There is little doubt that some changes are needed. Government revenues in 2016 are likely to total KD17.7bn ($58bn), which is about half the level they were at before the oil price fell sharply in 2014. According to London-based Capital Economics, the country ran a twin current account and budget deficit in 2016 – a rarity for Kuwait.

Even so, the country is still in a fairly strong fiscal position compared with its peers. UK/US Fitch Ratings estimates the breakeven oil price for the budget in the current fiscal year (which ends on 31 March 2017) is $46 a barrel, which is one of the lowest among the oil exporters it rates. That figure excludes statutory transfers of revenue to the country’s sovereign wealth fund – by law the government has to transfer 10 per cent of its revenues to the Reserve Fund for Future Generations (RFFG), which now holds some $384bn. The Kuwait Investment Authority (KIA) is also estimated to have assets of more than $500bn.

To cover its sharp drop in revenues and keep the economy ticking over, the government has been tapping into its reserves and the value of another savings pot, the General Reserve Fund, has fallen in the past two years to an estimated $117bn. That process may have to continue. Fitch Ratings is forecasting a budget deficit of KD1bn, or 3 per cent of GDP, for the current fiscal year and there will need to be a sustained rise in oil prices if the situation is to improve in the future. The government has also been lining up its first ever international bond, which will help to cover some of the gap between income and expenditure.

The more confrontational relationship that is likely between the new parliament and the government places some big question marks over the direction of the economy. There is a long history of parliament frustrating major spending plans of the executive in Kuwait and, if that were to happen once more, it could slow the process of diversification away from oil. On the other hand, if parliament tries to stop the introduction of new austerity measures, it will cause headaches for the executive, but could keep the economy moving at a faster rate.

In September, the government brought in petrol price hikes – the last of the GCC countries to do so – and it also has plans to increase electricity and water prices. If the planned reform measures are all enacted it could slow the economy, according to Capital Economics. “The government has outlined plans to tighten fiscal policy, through limiting growth in the public sector wage bill and further subsidy cuts,” says the firm. “A corporation tax is also set to be introduced and Kuwait is planning to implement a value-added tax alongside the other GCC countries by 2018. All of this will weigh on growth in the non-oil sector.”

However, if the government is not able to push ahead with its reform programme, there is little or no chance of the economy being able to diversify. In a research note published on 1 December, US ratings agency Moody’s Investors Service described the election results as “a clear repudiation of the government’s austerity measures”, and added that “this is credit negative because it will likely sway the government’s willingness to implement fiscal and economic reforms to reduce the country’s dependence on oil.”

In addition, government oil revenues could dip further if a deal agreed in November among Opec members is fully enacted. Kuwait is the fifth-largest producer of crude in the 14-member cartel, with a reference production level of about 2.84 million barrels a day (b/d), which it has agreed to cut by 131,000 b/d to take the figure to just over 2.7 million b/d.

The subdued oil sector has been having a noticeable knock-on effect on the rest of the economy. “Economic activity in the non-oil sector has continued to expand, albeit at a slower pace, reflecting the impact of lower oil prices,” noted the IMF in November. “Non-hydrocarbons growth slowed from 5 per cent to an estimated 3.5 per cent in 2015, as lower confidence weighed on consumption.”

A combination of the uncertain economic environment and the austerity measures certainly appears to be having an impact on consumer sentiment. Credit and debit card point-of-sale spending fell for the first time on record in the third quarter of 2016, according to the National Bank of Kuwait (NBK), with a year-on-year drop of 0.7 per cent. The bank says there has also been slow growth in imports of consumer goods, growth in household borrowing has weakened and real estate sales were down 26 per cent in the first ten months of 2016, compared with the same period the year before. The profits of companies listed on the local stock exchange are also down 6 per cent compared with last year.

Despite these negative trends, some important parts of the economy are still in reasonable shape. Kuwaiti banks have seen a steady improvement in the health of their loan books over the past few years, for example, with the proportion of problem loans falling from more than 5 per cent of all loans in 2012 to closer to 3 per cent by June 2016, according to Moody’s. The banks are well capitalised, have robust profitability and are better placed than many others in the region, according to Olivier Panis, a senior credit officer at the ratings agency.

“Kuwait, Qatar and the UAE remain strong, given their sizeable financial and natural reserves, coupled with relatively low 2017 debt forecasts for Kuwait and the UAE, although fiscal pressures continue to build,” he says.

All that is reflected in the negative outlook that Moody’s has for its ratings for Kuwait. It might not be time for the economy to be downgraded just yet, but there are reasons to suppose it could happen.