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Govt spending sees strong pick-up in H1 of FY2013/14 Budget surplus reaches KD 10.7 bln during first half

KUWAIT CITY, Jan 4: The recently released public finance figures for the second quarter of fiscal year 2013/14 (July to September) reveal a substantial pick-up in government spending. After a weak first quarter - partly related to the delay in approving the budget - reported government spending surged, driven almost entirely by current expenditures rather than investments. We expect to see a pick-up in capital spending in the second half of FY2013/14, although overall government spending growth is likely to be more subdued than last year. Total government spending reached KD 5.1 billion in the first half of the fiscal year - about KD 1.7 billion higher than a year ago. This came on the back of a rise in current expenditures, driven by two main factors. First, the large ‘miscellaneous & transfers’ segment, which incorporates items such as military salaries and transfers to the social security fund, was up by a huge KD 1.1 billion y/y.

Plans
Second, spending on wages and salaries, which constitute one-quarter of total spending, saw a KD 0.8 billion y/y rise. In part, both of these changes may reflect payment timing issues rather than a change in underlying spending policy. (Large increases were not factored into the annual budget plans, for example.) If so, large increases should smooth-out by year-end.  Also in current expenditures, spending on ‘goods & services’ declined by KD 0.2 billion y/y. The segment’s contribution to current expenditures fell to 14% from 29% in the same period of the previous year. The drop is likely attributed to a fall in the cost of purchasing fuel from local refineries, in order to supply power and electricity generation stations.
Meanwhile, capital spending recovered somewhat in the second quarter after a weak start, rising 9% y/y in 1H 2013/14 to KD 0.4 billion. Sluggish project implementation has kept the rate of capital spending at 60-70% of the full-year budget over the past two years. But with investment expenditures budgeted to dip in FY 2013/14, and an expected improvement in project execution, the rate of capital spending could see a marked rise this year.

In total, the level of overall recorded government expenditure reached its highest at this stage of the year in five years. Still, it is worth noting that the rate of spending, at 24% of the full year budget, is more or less in line with its historic average.  But perhaps more importantly, the macroeconomic implications of the latest spending figures are difficult to assess. A large part of the pick-up in spending came from the ‘miscellaneous & transfers’ segment, which incorporates certain intergovernmental transfers that do not affect the level of demand in the economy (i.e. are not actual “spending”). Since line-by-line spending details have not yet been released we cannot definitively isolate this impact. But if we strip out the ‘miscellaneous & transfers’ segment entirely, overall spending rose by a very robust 34% y/y in 1H 2013/14. Again, however, this may be affected by timing issues and we expect growth in spending to moderate significantly by year-end. Total government revenues reached KD 15.8 billion in the six months to September, down slightly from last year on lower oil prices. Oil revenues reached KD 15.0 billion, with the impact of a 3% y/y decline in oil prices only slightly offset by a small expansion in production.

While oil prices are likely to remain elevated, an expected cut in production during the second half of the year - in response to weaker global demand and rising oil supplies elsewhere - should keep revenues below last year’s record levels. Meanwhile, non-oil revenues increased by a strong 34% y/y to KD 0.9 billion on higher miscellaneous revenues and fees, likely linked to UN compensation payments. The budget surplus reached KD 10.7 billion in the first half of FY 2013/14, equivalent to about one-fifth of annual forecast 2013 GDP. Further increases in the surplus this year are likely to more limited, since spending typically surges in the second half of each year due to reporting issues. Nevertheless, Kuwait’s fiscal position is likely to remain strong. We project a budget surplus for FY2013/14 of around KD 11 billion. This is equivalent to some 22% of GDP - slightly below the 25% recorded last year, but still an extremely robust figure.




 

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