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Kuwait's economic activity expected to accelerate despite lower oil price
July 19, 2016, 4:25 pm
 Kuwait's economic growth has been resilient despite the lower oil price environment facing the country. Non-oil growth is expected to pick up slightly in 2016 and 2017, driven by public investment and a steady consumer sector, showed an economic report.
While the large decline in oil prices since the middle of 2014 has put pressure on the government's budget, the state's fiscal position is robust and is expected to continue to support large capital spending and steady employment growth, especially among nationals, said the report released by the National Bank of Kuwait (NBK) on Tuesday.

Of course, lower oil prices have produced fiscal deficits, though they remain relatively manageable. We estimate a deficit of around 12% of GDP for FY15/16, likely to be followed by a similar-sized deficit in FY16/17 before narrowing markedly in FY17/18, it indicated.

In addition to the steps already taken to reduce the fiscal deficit, the cabinet has approved a package of reforms that includes critical fiscal measures to address Kuwait's fiscal sustainability in the medium to long term, it added.

Pressure on the fiscal position is expected to ease in 2017 as Brent is seen gradually improving throughout the remainder of 2016 and into 2017, said the report, expecting Brent to be averaging around USD 45 a barrel in 2016 before rising to average USD 60 in 2017.

Nevertheless, the possibility of lower oil prices for longer remains a significant downside risk for the outlook. Weaker prices would put further pressure on the fiscal and external positions and could push the government toward more significant expenditure cuts and possibly even some reductions or delays in capital spending, it noted.

GDP growth in the non-oil sector is estimated to have accelerated to 3.5% in 2015 and should come in at 4-4.5% in 2016 and 2017, it said. The pace of growth has been improving since 2014 as the implementation of the government's capital projects improved. Growth has also been supported by a relatively stable consumer sector, bolstered by steady government hiring, the report added.

Private credit has reflected the improving pace of economic activity, with growth accelerating to 8.4% year-on-year (y/y) through March 2016. Credit growth is likely to end 2016 at an average pace of 7%, up from 6% in 2015. In 2017, average growth should rise further to 7.5% driven by a strong appetite to borrow and a banking sector with ample resources and healthy conditions, it said.
Overall GDP growth should improve to 2.9% in 2016 and to 3.3% in 2017. In addition to accelerating non-oil activity, the gradually improving outlook is driven by a resumption of growth in the oil sector; oil production is expected to grow by around 2% in 2016 and 2017, following two years of contraction.
The main reason is the gradual return of Neutral Zone output (Wafra and Khafji), which was lost in 2014 and 2015 and accounts for around 250 thousand barrels a day of crude, it added.
The outlook for economic growth is driven largely by government capital spending and an improving pace of implementation. The government's development plan targets investment of KD 34 billion by 2020. This sum includes significant private investment, as a number of large projects will be executed as public-private partnership projects (PPP), including the Al-Zour North power and water projects, the report showed.

After much delay, there has been a clear pickup in the pace of project implementation since 2013. More than KD 7.5 billion in projects were awarded in 2014 and another KD 12 billion during 2015, it indicated.

Awards thus far in 2016 have also kept up the pace, with KD 2.2 billion awarded through May 2016. The improvement in capital spending has also been reflected in the levels of aggregate investment, which are estimated to have risen to 33% of non-oil GDP in 2015 from an average of 30% during the prior four years, the NBK's report concluded. 



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