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Increased output, higher oil prices fuel growth
July 14, 2018, 2:45 pm
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Recent decision by the Organization of Petroleum Exporting Countries (OPEC) to raise oil production and the prevailing high oil price scenario are set to increase government spending and boost GDP growth in Kuwait.
 
The decision in late June by OPEC and several non-OPEC members to hike their collective production by a million barrels per day from July, is likely to benefit only a handful of oil producers that have the capacity to raise their production such as Russia, Saudi Arabia, the UAE and Kuwait. 
 
The ability to increase production output and the fact that oil is projected to trade in the $70 range for the rest of the year will result in higher oil revenues for Kuwait that could in turn boost public spending and drive both oil and non-oil GDP growth in the year ahead. According to analysts at the National Bank of Kuwait (NBK), the increased oil output and higher prices are likely to see overall GDP growth rise to 2.5 percent this year, after their sharp fall by 2.9 percent in 2017. 
 
In its latest update on the economic health of Kuwait, the bank noted that although the country’s fiscal balance is forecast to remain in deficit over the medium term, a combination of higher oil prices and spending restraint have improved the position substantially.
 
The deficit is estimated to have narrowed sharply to 6 percent of GDP in fiscal year 2017/18 from nearly 14 percent of GDP a year earlier. Oil revenues, which account for 90 percent of the total, jumped 24 percent year-on-year while expenditure is estimated to have grown by only 3 percent after a cumulative cut of 17 percent during the previous two years.
 
Since January 2017, when OPEC-mandated production cuts came into force, Kuwait has remained committed to its trimmed output quota of 2.7 million barrels per day (mbpd), and in the process incurred an 8 percent drop in oil GDP in 2017. Now, in line with OPEC’s decision to hike production, Kuwait is set to increase its daily output by 100,000 barrels, which would take production to 2.8mbpd and raise oil GDP by 1.5 percent overall in 2018, and by a similar percentage in 2019, said NBK in its latest update on the economy of Kuwait.
 
The NBK report also noted that non-oil growth, which improved to 3.3 percent in 2017 from 1.5 percent in 2016, is also geared to grow by 3.5 percent this year, mainly on the back of around KD4 billion in project contracts that are scheduled to be awarded this year.
Growth is also expected to be boosted by consumer spending. Market confidence that returned with the upturn of oil prices at the end of 2016, has remained buoyant on prevailing low inflation and stable employment growth in the public sector. Softer international food prices in recent months and a decline in housing costs are likely to maintain inflation at a 15-year low of just 1.0 percent this year, from the 1.5 percent recorded in 2017.
 
GDP growth is also expected to get a fillip from the government’s planned expansionary fiscal policy for the 2018/2019 financial year, which envisions greater capital spending. The expansionary polices, after nearly four years of contraction, have been encouraged by the relatively higher oil revenues and brighter production prospects in the months and years ahead.
 
Oil-industry sources have revealed that the country’s total production would be incremented by over 30 percent from the current 3.15mbpd to 3.65mbpd by the end of the year. In February, elaborating on the country’s oil strategy, Kuwait’s Minister of Oil, Minister of Electricity and Water, and Chairman of Kuwait Petroleum Corporation (KPC), Bakheet Al-Rashidi, reiterated that the oil production capacity would be raised to 4.0mbpd by 2020, which would then be maintained well into 2030, before hiking it further to 4.75mpbd by 2040. The increased production capability would enable the country to have the buffer needed to boost daily production or export volumes based on Kuwait’s oil marketing policies, said the minister.
 
However, the NBK report warned that although demand-side conditions looked reasonable in the near term, structural measures were needed to boost the economy’s longer-term growth potential. Though higher oil prices reinforce the country’s fiscal position and encourage public spending and short-term GDP growth, there are fears that the brighter economic scenario will slow down impetus for much-needed economic reforms and attempts to wean the market from its over reliance on income from hydrocarbon resources.
 
The government would need to make concerted efforts to overcome some of the hurdles that it faces, including finding ways to restructure an already bloated public sector that continues to absorb the bulk of young nationals entering the labor pool each year. In addition, the executive would also have to find a way to work with a contentious parliament that blocks or delays much-needed economic and business reforms. 
Lawmakers have consistently either held-up or watered down many of the reform initiatives proposed by the government, including by having fuel subsidy cuts revised, exempting citizens from increases in utility charges and postponing the implementation of VAT at least until 2021. The government, which has met around half of its funding needs since April 2016 through debt issuance, including an inaugural $8 billion sovereign bond in March 2017, has also been thwarted by parliamentarians in its attempts to reform the debt bill. 
 
- Staff Report
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