Dubai: Despite the lower oil-price environment Kuwait’s economic outlook remains strong on high public spending and stable fiscal buffers, according to a report from Abu Dhabi Commercial Bank’s (ADCB) economic research team.
“We expect an acceleration in real non-oil GDP [gross domestic product] growth in 2016 and 2017 to above 3 per cent from 1.3 per cent in 2015 as the investment programme continues to gain momentum. Project awards have remained strong in 2016, despite the lower oil price, and the pace of project implementation has picked up,” said Monica Malik, Chief Economist of ADCB.
Kuwait’s public spending programme is focused on upgrading key infrastructure including refinery, utility and urban facilities including development of new cities.
Kuwait’s commitment to its investment programme despite the low oil-price environment is reflected in its 2017-18 Development Plan, announced at end-July 2016. KWD4.75 billion ($15.75 billion, Dh57 billion) has been earmarked for 2017 and 2018 to upgrade infrastructure and diversify the economy. The plan also hopes to boost manpower skills, health-care facilities and housing for nationals.
The objectives of the public investments are in line with those of the 2015-19 five-year development plan. The five-year plan reflects the poor progress that Kuwait made in its investment programme in 2010-14. Kuwait’s strong foreign exchange reserve position and low debt provide vital space for the government to progress with its investment programme.
Analysts say years of underinvestment have led to supply bottlenecks. The improved political backdrop from 2013 has supported the progress of the investment programme. A potential risk to the investment and growth outlook could be a less cooperative parliament following the next National Assembly elections (due by July 2017). A number of opposition MPs who boycotted the previous elections (July 2013) have indicated that they will participate in 2017. However, the recent strong awards should still result in solid investment momentum in 2017.
A combination of factors such as higher oil output and non-oil activity is seen compensating for lower oil prices. The hydrocarbon sector is providing positive support to real GDP growth in 2016 and 2017 after three years of contraction.
“The government is pushing ahead with plans to increase oil output, though we see a risk of its 4 million barrels per day by 2020 target being missed,” said Malik.
Deficit manageable
Despite posting its first fiscal deficit in over a decade in 2015-16 at an estimated 12 per cent of GDP, Kuwait is in a strong position to proceed with countercyclical spending.
The government has substantial fiscal buffers, including low gross debt at around 10.6 per cent of GDP in 2015 and FX reserves over 400 per cent of GDP including assets of sovereign wealth funds. These buffers have given Kuwait room to fund its fiscal deficit without a major deterioration in macroeconomic fundamentals.
“The government has responded to the low oil price environment by protecting capex and rationalising current spending. Nevertheless, the size of the deficit reflects the budget’s heavy reliance on oil revenue. We estimate only a very moderate narrowing in the deficit in 2016-17 to 11.5 per cent of GDP,” Malik said.
The relatively stronger banking sector liquidity compared to GCC peers also supports Kuwait’s positive outlook. Liquidity in the banking sector remains comfortable, and there has been some improvement in liquidity conditions in 2016.
The loan-to-deposit ratio moderated to 82 per cent in May 2016 from 86.1 per cent in November 2015. Kuwait is not seeing the same liquidity tightening pressure as some other GCC countries, who are experiencing greater fiscal stresses with the lower oil price.
