Real GDP expands by 1.8 pct in 2015 – Growth boosted by strong investment

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KUWAIT CITY, Aug 22: Preliminary national account figures show overall GDP growth accelerating to 1.8 percent in 2015 from 0.5 percent in 2014, boosted by record high investment.

While the figures show nonoil GDP growth slowing to 1.3 percent in 2015, we think growth will likely be revised higher when final figures are published later. Data prepared by the Central Statistical Bureau (CSB) also show domestic demand growth improving in 2015, with stronger investment growth making up for some weakness in government and private consumption.

The oil sector, which includes the production of crude oil and natural gas as well as oil refining activity, shrank by 1.7 percent in 2015 in real terms. The decline, which represents the third year of decreasing real output, was not due to lower crude production, which was essentially flat averaging 2.86 million barrels per day in 2015. Instead, the sector’s contraction was due to a 19 percent decline in refining activity during 2015, according to the CSB. It is not clear why there was such a decline especially with independent figures indicating that Kuwait’s refining output grew by around 3 percent during the year. Notably, over the last five years, changes in real output have largely mirrored changes in this sector’s nominal GDP.

In nominal terms, oil sector GDP plunged in 2015 on a sharp decline in the price of oil last year. As the average price of Kuwaiti crude declined by half to $48 per barrel during 2015, nominal oil sector GDP saw a 46 percent decline. This followed an 11 percent decrease in 2014. The price of Kuwait export crude (KEC) has fallen further since, averaging $35 during the first seven months of 2016.

In real terms, the nonoil sector showed a surprising slowdown in 2015 to 1.3 percent, though we think this figure will likely be revised upwards. The largest decline was in the “electricity, gas and water” sector, which, according to official preliminary figures, shrank by 9.8 percent. The government-dominated “public administration and defense” sector also saw a notable slowdown with growth slowing to 2.4 percent (Table). Weakness also came from “wholesale and retail trade” and “financial institutions and insurance”. Meanwhile, “real estate and business services” remained in contracting mode, shrinking by 1.4 percent in 2015.

Investment saw a strong boost in 2015 as Development Plan implementation improved. Aggregate investment spending grew by 13 percent during the year, rising to 36 percent of nonoil GDP, a level that has not been recorded for over 20 years. This strength does not come as a surprise, given the clear pick up seen in the awarding of Development Plan projects during 2014 and 2015. Bank lending has also reflected the solid increase in capital spending, as credit growth rose to 8.5 percent year-on-year (y/y) by the end of 2015.

Strong investment helped support domestic demand, which saw growth accelerate in 2015. Domestic demand, which includes final consumption by households and the government as well as investment, grew by 4.4 percent in 2015, up from 3.1 percent the year before. But unlike investment, private and government consumption did not do as well, both appearing to take a hit in the current low oil price environment. Private consumption growth was more than halved to 2.4 percent. Meanwhile, government consumption saw a small decline of 0.5 percent, similar to the one seen in 2014.

The latest figures reveal a notable upward revision in 2014 nonoil GDP growth. According to the latest revised figures, the nonoil sector grew by 4.8 percent in 2014, the most rapid pace since the 2008 financial crisis, up from a preliminary 4.2 percent. Growth in aggregate investment and private consumption also benefited from upward revisions. Meanwhile, government consumption was revised substantially downwards, with a preliminary growth estimate of 8.8 percent for 2014 revised to a 0.8 percent contraction.

In our view, nonoil activity is expected to maintain growth of around 4-5 percent in 2016 and 2017, and 2015 growth is likely to be revised up. Growth ahead should continue to be supported by strong investment spending as Development Plan implementation maintains the current, improved pace of execution. Authorities remain keen to push ahead with strategic projects worth upwards of KD 30 billion over the next 3-4 years despite the low oil prices. Very comfortable fiscal buffers and a number of fiscal reforms should help Kuwait weather a period of reduced oil revenues without having to resort to cuts in planned capital spending.

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