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Implementing policies key to economic health in 2019
December 29, 2018, 2:37 pm
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Latest report on the economic health of Kuwait going into the new year shows that in the first seven months of 2018/19 fiscal year (FY), which began in April, Kuwait recorded a fiscal surplus of KD3.1 billion. This was a dramatic climb from the KD1.5 billion deficit registered in the same period a year earlier.

The report, published by the National Bank of Kuwait (NBK), attributes the impressive turnaround mainly to an increase in oil revenues during the period until October. Volatility of oil prices on the global market has a preponderant impact on government revenues, as income from oil accounts for nearly 50 percent of the country’s GDP and over 90 percent of its budget receipts.

During the first seven months of FY2018/19, oil revenue jumped by over 50 percent year-on-year (y/y) due to international oil prices rising by around the same percentage. Another reason behind the windfall fiscal surplus came from an unexpected fall in government spending by 8 percent during the review period.

However, analysts at the bank cautioned that the spending decline could be the result of reporting issues and that once the real numbers are in the surplus figure could drop.

In fact, given recent fall in oil prices, the fiscal position for the full 12 months of FY2018/19 could once again move into deficit territory, although the deficit would be much smaller than in previous years, said the report.

Oil price fluctuation over the last two months have seen a barrel of Brent going from $77.7 at the end October to $50.5 on 26 December. In the meantime, Kuwait Export Crude (KEC), which declined by 7 percent in October and slumped to end November at $58 per barrel, dropped further to $49.6 per barrel on 26 December.

The sharp drop in prices was precipitated by reports of growing oil stockpiles and fears of a global economic downturn in the year ahead. In response to the fall in prices, the Organization of Petroleum Exporting Countries (OPEC) and its non-OPEC partners agreed in early December to cut production by 1.2 barrels per day for six months starting from January 2019.

The combination of a fall in oil prices and mandated production cuts could significantly dent Kuwait’s public finances and growth prospects in the coming year. In October, based on prevailing low global oil prices, Kuwait had voluntarily cut output to 2.76 million barrels per day (b/d) from the 2.81million b/d in September.

Since the upcoming OPEC-mandated production cuts will use October’s production levels as the base to calculate trimming quotas by countries, Kuwait could see its production drop further in the first half of 2019.

This will impact the country’s oil GDP growth and consequently budget revenues in the coming fiscal. Meanwhile, growth in non-oil sector is unlikely to be sufficient to take up the slack from expected fall in oil GDP and support the overall economy.

Construction and related manufacturing, which accounts for a significant part of non-oil activity was subdued throughout 2018. Technical delays and cancellations led to a drop in the awarding of projects in all quarters of the year.

Total project awards in 2018 were only a little over KD1.1 billion — less than a third of the KD3.8 billion planned for the year. Less than favorable GDP growth, as well as a deterioration in the general macroeconomic environment, were cited among reasons for Kuwait’s fall in ranking, in the annual ‘Global Competitiveness Report’ published by the World Economic Forum (WEF).

The WEF in its ‘Global Competitiveness Report’ for 2017-18 ranked Kuwait 52nd among 137 countries, a drop from the 38th rank the country held a year earlier. In a survey for the WEF report, 22 percent of executives identified government bureaucracy as a main challenge to doing business in Kuwait, while 12 percent blamed corruption and 11.5 percent cited restrictive labor conditions as cause for concern in doing business.

The WEF report highlighted that Kuwait needed to expand its innovation capacity by investing in higher education and training, create a more inclusive labor market and make the most of its available human capital.

Despite the macroeconomic challenges, Kuwait continues to enjoy the confidence of international rating agencies. In February 2018, Standard & Poor’s (S&P) affirmed ‘AA/A-1+’ ratings with a stable outlook for Kuwait. In May of this year, Fitch Ratings gave Kuwait a grading of ‘AA’ with a stable outlook based on what it said were “strong financial metrics and a forecast fiscal break-even Brent crude price of $56 per barrel.”

A year earlier, in May 2017, rating agency Moody’s had also given positive ratings to the country, citing it had seen “sufficient signs” of the government’s capacity to implement fiscal and economic reforms. However, the endorsements from sovereign credit rating agencies had all come with caveats.

For instance, Fitch had cautioned that the country’s positive indicators were tempered by the high degree of oil dependency, notable geopolitical risks, and less-than-ideal governance and business environment, as well as an economically dominant public sector.

Similarly, S&P had stated that it could lower its outlook in the case of lower-for-longer oil prices weakening fiscal and external finances, domestic political stability deteriorating or significant escalation in regional geopolitical tensions.

The fact that in 2018 many of the stipulations made by the agencies were not met or failed to materialize is a cause for concern. There were no significant changes in the economic structures, priorities and policies of the government, even as the market’s strong dependence on oil, the continued dominance of public sector, and the ‘less than ideal’ governance and business environment continued unabated.

To wait and watch how the economic landscape unfolds in the year ahead and then react is one option, a better choice would be to implement proactive changes now.

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