Dubai: Kuwait has initiated a number of fiscal reforms in response to prolonged low oil prices. So far, the pace fiscal reforms have been limited in Kuwait, which has lagged behind other GCC countries and its impact on private consumption has been limited.
Going forward, fiscal reforms in terms of higher oil prices and power tariffs are likely to soften private sector consumption.
“We continue to forecast below-trend private consumption growth as the government restrains current expenditure growth. This was seen in 2015 when the pace of private consumption growth more than halved to 2.4 per cent from 4.9 per cent in 2014. We believe that this figure may be revised upwards in the final GDP [gross domestic product] data but would still be below the 2014 level,” Monica Malik, Chief Economist of ADCB, said.
A key objective for the government has been reducing the annual increase in public sector wages. We see public sector wage growth remaining in the low single digits in the outlook period alongside slightly softer (though still rising) hiring. Moreover, we see private sector remuneration growth moderating with the lower oil price and there have also been signs of expatriate job losses.
The impact of fiscal reforms on private consumption is expected to increase in end-2016 and 2017. Gasoline prices increased on September 1, 2016, by between 40 per cent and 73 per cent depending on the grade of petrol. A government committee will revise the new petrol prices every three months with regard to international oil prices.
Despite the September increases, gasoline prices remain below the liberalised market price and most other GCC countries (ex-Saudi). The impact of the gasoline increases on inflation should be relatively contained, as energy products account for 2.6 per cent of the inflation basket.
“We estimate that the fuel price increases will add around 0.7 percentage points to headline inflation, which stood at 3.1 per cent in July 2016. The main driver of inflation remains housing services (7.3 per cent year on year in July 2016), driven by the housing shortage,” said Malik.
Water and electricity prices for expatriates and non-GCC corporates are also due to rise from mid-2017. Nationals’ disposable income should remain high, which is one of the main drivers of private consumption.
“We think it is unlikely there will be further fiscal reforms that impact nationals, especially ahead of the parliamentary elections,” said Malik.
MPs have already opposed reforms that impact nationals. Meanwhile, household spending is expected to be supported by solid retail credit growth, which has continued to expand by double-digits in 2016.
