20/09/2023
20/09/2023

KUWAIT CITY, Sept 21: EFG Hermes stated in a recently issued report that Kuwait's financial position will remain solid in the medium term, especially with the addition of investment income, thanks to high oil prices and strong returns from the sovereign wealth fund, reports Al-Rai daily.
Hermes expected that Kuwait would enjoy a surplus in the fiscal year 2023 of 23 percent of the gross domestic product, and that the surplus would continue in the fiscal years 2024 and 2025, albeit at more moderate levels of 5.4 percent and 6.6 percent, respectively, as a result of the decline in oil prices.
After reviewing the budget presentation presented by the Ministry of Finance, which excludes investment income, Hermes expects a budget deficit in the next two years of 7.4 percent and 6.4 percent of GDP after the large surplus recorded by Kuwait last year by 12 percent.
Hermes indicated that the deficit it expects is smaller than the deficit estimated by the government budget, which was based on a moderate price of a barrel of oil of $70, expressing its belief that the expected deficit for the fiscal year 2024 will likely not constitute a major problem in terms of financing because the General Reserve Fund It was strengthened last year by a surplus of 6.4 billion dinars.
However, there remains a major priority to increase the Fund's liquidity through financial reforms primarily and to issue a debt law to create a more sustainable financial trend in the medium term.
EFG Hermes expected a contraction in 2023 of 0.8 percent in GDP growth and growth of 2.6 percent in 2024, compared to growth of 8.2 percent in 2022. The reasons were attributed to the decline in oil production and the slowdown in private consumption growth. She pointed out that Kuwait adhered to OPEC Plus commitments to reduce production, so that it decreased on average this year by 3.5 percent to 2.61 million barrels per day.
As for private consumption, which was the strongest driver of economic growth over the past two years, it is likely to continue to slow down from a high base. It is also likely that disposable incomes will return to normal levels as high savings rates slow down.
However, Hermes believes that the trend of private consumption will remain good in general, but will slow down from its high base, adding that non-oil growth is therefore expected to slow in 2024 to 3.5 percent from an estimated level of 3.8 percent in 2022.
“Hermes” indicated that the additional driver of the expected moderate growth in GDP is moderate growth in investments. The budget for the fiscal year 2024 expects a decline in investment spending by 21 percent, due to considerations including achieving a balance with the slightly high level of current spending, thanks to the huge awards in the energy sector.
This high level of project awards indicates a somewhat weak growth in corporate credit growth last year, and is therefore likely to continue, especially in conditions of high interest rates.
On the other hand, “Hermes” said that the National Assembly recently approved the final draft of the budget for the fiscal year 2023/2024, in addition to the final accounts for the budget for the fiscal year 2022/2023, and the final accounts show a surplus that enhances the country’s financial reserves. She stressed that all cases indicate that Kuwait continues to enjoy a comfortable financial position, as the financial system generates external assets that are likely to have exceeded the level of $800 billion, or 500 percent of the gross domestic product.
The sharp rise in oil prices in 2022, coupled with a significant increase in oil production, led to a significant increase in oil revenues (which during the year recorded their highest level in 8 years), which in turn created a large surplus in the financial budget amounting to 6.4 billion dinars.
However, non-oil revenues declined by 13 percent on an annual basis for reasons, the most important of which is the end of Gulf War compensation.
The latter was overshadowed by a rather strong growth of 26 percent in tax revenues as the economy recovered strongly from the effects of the pandemic.
In addition to the strong rise in oil revenues, the fiscal surplus was also marginally supported by a decline in total expenditures of approximately 3 percent, with current and capital expenditures declining. Wages fell a marginal 1.2 percent from last year's high base, while social benefits fell a further 61 percent year-on-year as healthcare expenditures fell. Overall, total expenditures were 95 percent of the budget, broadly in line with historical trends.
Hermes noted that, in line with recent legislative changes, and despite the large surplus, the Ministry of Finance was not obligated to provide any large transfers to the Future Generations Fund.
The government transferred only 1 percent of the surplus, or only 64 million dinars. Therefore, the surplus is saved to strengthen the general reserve fund. Historically, the law required the government to transfer 10 percent of its revenues to the Future Generations Fund.
On the broader financial level, that is, when investment income is added to the budget, according to the IMF’s unified methodology, the fiscal surplus actually swells to 12.5 billion dinars, equivalent to 23 percent of GDP, in a clear indication of the government’s strong basic financial position.
“Hermes” expected a decline in the main financial performance this year compared to the exceptional levels witnessed last year, and the main reasons for this are due to the oil prices returning to normal levels of approximately $100 per barrel last year and ine-time expenditure items. Consequently, the government expects a budget deficit of 6.8 billion dinars, which Hermes believes is very conservative.
Hermes noted that in the draft budget approved by the National Assembly on August 2, the government expected a 20 percent decline in oil revenues, thanks to lower prices and oil production. She indicated that, conservatively, the government allocated $70 per barrel in its budget, which is less than $80 per barrel assumed in last year’s budget and approximately 28 percent lower than the current market price. In parallel, the government assumes that oil production will decrease by 2 percent on an annual basis to 2.68 million barrels per day.
In addition, Hermes explained that the government is planning a significant increase in spending (+12 percent year-on-year), and spending will be entirely driven by recurrent expenditures, which are scheduled to rise by 15 percent. At the same time, capital expenditures are expected to decline. By 21 percent, Hermes notes that the noticeable increase in current expenses is partly due to one-time items.
The government said that the budget includes 1.55 billion dinars in arrears and settlements, most of which are clear in the components of wages and subsidies. Excluding these one-offs, total expenditures would have increased by a more moderate rate of 5 percent.
Hermes expects the fiscal deficit to reach a relatively more moderate level of 3.7 billion dinars, as oil prices are likely to reach $80 per barrel. It also expects spending slightly less than the allocated budget.
She said the deficit should be easily financed through government reserves. On the broader financial level, that is, when considering the addition of investment income, according to the IMF’s financial presentation, “Hermes” estimates that the budget will record a total financial surplus of 2.2 billion dinars (4.5 percent of GDP), which again shows the financial position The comfortable basic that Kuwait enjoys.