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Growth picks up pace as economic slowdown recedes
December 16, 2017, 5:00 pm

Recent economic slowdown appears to be receding as the Kuwait market begins to shrug off the sluggishness triggered by the slump in oil revenues since mid-2014 and subsequent fiscal adjustments by the government. Non-oil activity in 2017 improved to 3 percent and is set to accelerate further to 3.5 percent in 2018 and to 4 percent in 2019. Meanwhile, the current account is set to swing back to surplus in 2017, after recording its first deficit in over 20 years in 2016.The first-quarter of the year recorded a surplus of KD400 million and the second-quarter nudged the surplus further up to KD600 million.

In its latest prognosis on the economic health of Kuwait, the country's leading commercial lender, the National Bank of Kuwait (NBK), said that momentum for this nascent growth came mainly from capital spending, especially spending on New Kuwait 2035, the government’s revised National Development Plan. The bank added that the more gradual approach to implementing fiscal adjustments should also see the drag on growth being reduced while ensuring continued progress on lowering the fiscal shortfall.

After recording a deficit of 4.5 percent of GDP in 2016, the indications from past fiscal quarters of 2017 are that Kuwait would record a surplus of around KD1.9 billion, or 5 percent of GDP for the whole of 2017. The turnaround comes on the back of higher oil price, with the Kuwait crude oil price expected to have increased by more than 30 percent between 2016 and 2017. But analysts caution that with oil expected to remain within a narrow range in the immediate future, the current account could deteriorate slightly in 2018 and 2019.

Nevertheless, substantial fiscal buffers, including large foreign reserves placed strategically in its sovereign wealth fund (SWF), and the relatively low break-even oil price, means Kuwait has significant elbow-room to move gradually on fiscal adjustment than some of its Gulf Cooperation Council (GCC) peers.

A relatively prudent fiscal policy over the years has allowed Kuwait to amass and sustain one of the largest SWF in the region. Kuwait’s SWF is estimated to be worth around $560 billion or 450 percent of GDP as at the end of 2017, with bulk of the assets held overseas and split between the Future Generations Fund (FGF), the assets of which are considered 'untouchable' except in national emergencies, and the General Reserve Fund (GRF), whose holdings are mostly in liquid assets and available to finance the government's budget deficit.

But relying on unstable oil prices to fuel growth, or a voluminous SWF to tamp down on the pace of fiscal adjustment, is not judicious move and is replete with inherent dangers.

Though the probability of oil prices moving much lower from current levels of around $55 – $60 per barrel has receded for now, it remains a distinct risk going into the future. While Kuwait would be able to sustain a much lower oil price for some time, any drastic drop in price could alter the government’s fiscal policy and hurt market sentiment, with the consequent impact on non-oil activity.

Similarly, depending on what might appear by all measures to be a substantial SWF is also a risk as the chances of it dwindling rapidly, especially under sustained economic pressure, are very real. Saudi Arabia realized this following the oil-price slump of 2014. According to a report in the Wall Street Journal in December 2016, the Saudi Arabian Monetary Authority (SAMA), the nation’s central bank which controls SAMA Foreign Holdings, the Saudi SWF, said its reserves fell by more than 25 percent to $543 billion in just two years to the end of October 2016.

So far Kuwait, despite the ready availability of funding from its GRF, has opted to rely more on debt to finance its deficit. Since April 2016, the government has issued KD3.6 billion in debt domestically and another KD2.4 billion internationally to take the total debt issued as of October 2017 to KD 7.1 billion, or 20 percent of GDP. Since 2016, debt issuance has financed around two-thirds of the budget deficit.

But new debt issuances have been kept in abeyance since September 2017 following the expiration of the law that allows the Ministry of Finance to issue new debt. The government has introduced new legislation for consideration by the National Assembly to renew the issuance mandate and double the sovereign borrowing ceiling to KD20 billion, as well as allow the issuance of debts with a 30-year period. At present debts are limited by law to 10-year periods.

With the government committed to maintaining its capital spending plans and compelled to continue absorbing national manpower into the labor market, the government has to urgently push through much-needed structural reforms to encourage the private sector to play a larger role in the economy, both through their investments and by generating new jobs in the medium-to-long-term.

Though it is salutary that the government plans on raising around a third of capital spending from public-private partnership (PPP) projects, so far the progress on such projects have been slow. It is hoped the pace will pick up in the coming years.

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