Growth prospects improve with lifting of most restrictions
KUWAIT CITY, April 7: Kuwait’s economy is slowly emerging from the economic dislocation caused by the coronavirus pandemic in 2020. GDP fell by an estimated 8% last year — the steepest decline in output since the 2009 fi- nancial crisis — as businesses were shuttered, staffing levels cut, projects halted and incomes pressured amid a precipitous drop in oil prices. Pandemic-related policy support, especially for SMEs, was also limited and centered mainly on debt repayment. Growth prospects have improved with the lifting (until recently) of most restrictions. Consumer sentiment is more upbeat, and pent-up demand has boosted consumer spending growth, which stood at 20% y/y in February (KNet data).
Bank credit to households is increasing at the fastest pace since mid-2018. After a lackluster 2020, the projects market should gain a little more traction over the forecast period, helped by greater private-sector buy-in.Though the re-imposition of a partial curfew in March and the uncertain pace of vaccinations will be worth watching, non-oil growth should recover to about 4% this year before normalizing at 2.5% in 2022. Oil GDP (in its broadest definition) should rise by 1% this year and by 7% in 2022 as crude oil production increases in line with the easing of OPEC+ cuts and the full commissioning of the Clean Fuels and New Refinery Projects, which should double Kuwait’s refining capacity. Gains in both Jurassic light and Lower Fars heavy crude output will help offset some of the decline in production capacity due to the ageing Burgan field.
Fiscal sustainability in the spotlight amid tighter liquidity
Last year’s twin Covid-19 and oil price shocks led to a record and sixth consecutive fiscal deficit of KD8.9bn (28% of GDP). Financing the deficit and achieving fiscal sustainability has taken on greater urgency following the near depletion of the General Reserve Fund (GRF), the inaccessibility of the Reserve Fund for Future Generations (RFFG), Kuwait’s sovereign wealth fund (SWF), and the absence of parliamentary approval for a new debt law. While the authorities have been able to buy themselves some time through cuts in capex, asset swaps between the GRF and the RFFG and moves to reschedule more than $20bn in accrued dividends with state oil company KPC, systemic fiscal reforms are imperative.
The government unveiled an expansionary budget for FY2021-22 that sees spending rising by 7% y/y (budgeton- budget), revenues by 45% and the deficit widening to KD12.1bn. We see the deficit narrowing, however, to KD6- 7bn (17% of GDP)this year and further to 10% of GDP by 2023 due to a combination of spending restraint and greater oil revenues thanks to higher oil prices. Tapping new non-oil revenue sources, however, appears limited to possible excise duties and the VAT. We do believe that the debt law will pass this year, which should alleviate some of the liquidity pressures. There is also an economic case for defi- cit financing via debt issuance rather than reserve drawdowns in the current low interest rate environment. Moreover, public debt, at KD3.8bn (12% of GDP) at end-2020, is the lowest in the region so there is ample scope. The current account looks to have performed better than expected in 2020, benefiting from higher investment income and a rebound in oil export revenues to register a surplus of 4% of GDP. Foreign reserve assets at CBK were stable at $47.5bn (42% of GDP) at end-2020, providing more than 12 months of import cover. Financial buffers are substantial with more than $550bn of assets held by the aforementioned SWF.