Current deficit budgets are only a short-term phenomenon and the budget balance in Kuwait will turn back to surplus by 2019 on the back of recovering oil prices, says the latest review of the country’s economy by BMI Research, a division of Fitch Group, the global leader in international financial information services.
In support of their optimistic bearing, BMI pointed to Kuwait’s low public debt, which it said would continue to remain negligible over the next decade even if oil prices stay relatively low at an average of $67 per barrel over the next ten years.
The research and analytics firm pointed out that Kuwait government’s attempts to increase non-oil revenue, cut government spending, rein-in subsidies, increase fees for services to expatriates and introduce value-added tax (VAT) by 2018, in line with other Gulf Cooperation Council (GCC) states, would all work to help plug the deficit gap.
However, the firm warned that these measures would fail to compensate for the fall in oil revenues and that total revenues were expected to recover to 2014 level only by the end of the coming decade. Moreover, the government’s ability to implement serious economic reforms would be limited by a watchful parliament, which is likely to block many of the government’s spending cuts.
On the spending front, BMI Research said it believed that Kuwait’s sovereign wealth fund, which was estimated to be around $592 billion at the end of 2015, would help the government tide over current budget deficits, fill-in for any emergency expenditure and avoid any full-blown fiscal crisis.
Also, the report said public expenditure was expected to increase at a much slower pace than over the past decade. Between 2006 and 2015, government spending growth averaged 18 percent, well above the 0.5 percent average forecast for the next 10 years.
BMI Research said that with falling revenues and limited cuts in spending, it forecasts Kuwait's fiscal balance to turn negative in 2016, and remain so only temporarily. "In our view, the Kuwaiti government will face only three years of deficits (2016, 2017 and 2018). From 2019, oil prices will have recovered enough for the country's budget to return to surpluses," the report noted.
"For the rest of the decade, Kuwait will therefore post budget surpluses, albeit smaller than the ones recorded during the oil boom. As a result, the country's public debt — estimated at only 4.4 percent of GDP in 2015 by the IMF — will remain negligible. We expect the Kuwaiti economy to see modest growth over 2016 and 2017, forecasting real GDP growth of 1.5 percent and 2.0 percent, respectively, from 1.4 percent in 2015,” it added.
After a long period of stagnation, the Kuwaiti investment outlook also appears to be improving, while an uptick in oil output will support growth over the coming quarters, noted the research firm. However, the report cautioned, Kuwait's ever-volatile political situation would remain a key downside risk to economic activity, alongside the country’s over-reliance on hydrocarbon revenues.
The report cautioned that like other GCC states, Kuwait's fiscal balance is dependent on the country's hydrocarbon exports and international oil prices have an overwhelming bearing on the country’s finances. Oil revenues have accounted for more than 90 percent of all government receipts for more than ten years. During the commodity boom years of 2007-2014, Kuwait's budget surpluses averaged 20 percent of GDP.
- The Times Report