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Reforms shelved as growth picks up
September 8, 2018, 5:03 pm
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Oil prices that have rebounded robustly in recent months have helped Kuwait boost economic activity, increase trade surplus and decrease its fiscal deficit. Concomitantly, the government announced a KD1.5 billion hike in expenditure from the KD20.5 billion initially outlined in the draft budget for fiscal year 2018/19.

With improving financials, the political and structural reforms needed to enhance institutional effectiveness and improve long-term economic diversification once again appear to have taken the back-seat. The government has apparently put the brakes on fiscal, economic, and administrative reforms, deferred the imposition of VAT until probably after 2020 and generally toned down the pace of privatization and market diversification.

In its quarterly assessment on the country’s economic well-being, the National Bank of Kuwait (NBK), reiterated the view that the improved financials were no ground for complacency, and warned that long-term sustainable economic growth still faced headwinds.

Undoubtedly, Kuwait has significantly improved its fiscal position in recent months. The recent shift in production policy by the Organization of Petroleum Exporting Countries (OPEC) is also expected to favor the country’s oil exports

Throughout 2017 and well into the first-half of this year Kuwait had been consistently adhering to OPEC mandated oil-production cuts. Over the months, this resulted in output falling by 100,000 barrels to 2.7 million barrels per day (mbpd), oil GDP dropping by 8 percent and the country’s overall GDP falling 2.9 percent.

In July of this year, OPEC decided to reinstate oil production to January 2017 levels, in order to compensate for fall in exports from several member states. This decision is expected to favor only a handful of nations, including Kuwait, which have the capability to ramp up production. Accordingly, Kuwait’s oil output is now projected to climb back to 2.8mbpd by the last-quarter of 2018, and consequently oil GDP is predicted to rise by 1.5 percent.

Oil industry sources have also indicated that work is currently underway to raise the country’s total oil production capacity to 3.65mbpd, from the current 3.15mbpd. This would tentatively allow Kuwait to hike output in the short-term by nearly a third from current yield levels.

Meanwhile, on the non-oil front, growth is predicted to remain around the 3.5 percent rate displayed in 2017, mainly on the back of continued project activity. Despite repeated delays in project implementations, the project award pipeline is expected to remain around KD4 billion this year, which is roughly the same as in 2017.

According to the Kuwait Authority for Partnership Projects, the government entity responsible for public-private partnership (PPP) projects, three PPP projects lined up for awarding in 2018 are the Labor City, the Kabd Municipal Solid Waste Project and the Umm Al-Hayman Waste Water Project. The awarding of these projects is expected to revitalize the infrastructure sector that has been plagued by repeated delays and cancellations in the past.

Other figures from the NBK report reveal that the price of Kuwait Export Crude averaged $63 per barrel in first-quarter of 2018 — a 9 percent increase quarter-on-quarter. This helped oil receipts add KD193 million during the quarter to reach KD4.4 billion. 

Current Account registered its highest surplus in three years in the first-quarter of the year. The surplus at KD1.7 billion (17% of quarterly GDP), was up from KD1.2 billion registered in fourth-quarter of 2017. The trade surplus in first-quarter rose to KD3.4 billion from KD2.3 billion in last quarter of 2017, lifted primarily by higher oil receipts and non-oil exports, while imports held steady.

The rise in the trade surplus also more than counter-balanced the widening services deficit, lower investment income, and higher remittances. Against a backdrop of improving economic prospects, the deficit in services balances widened to KD1.9 billion, while investment income eased for a second consecutive quarter, weighed down by an unsteady global equity market.

On the other hand, remittances increased following two quarters of declines to top KD1 billion revealing that the effect of fuel subsidy cuts and various fee increases on expatriate income seem to have faded. Growing uncertainty over the outlook of expat employment and living costs, in light of intensified efforts to provide employment to national manpower, as well as threat of a tax on remittances and better exchange rates, may all have also contributed to the increase in outflows.

Though fiscal balance is forecast to remain in deficit in the medium term, the country’s overall financial position remains extremely strong. Accumulated savings from previous revenue surpluses are believed to have filled the country’s sovereign wealth fund coffer to the tune of $550 – 600 billion. Annual returns on these assets, which are not included in the headline fiscal accounts, are estimated to be around 12 to 13 percent of GDP.

The wealth fund assets, which is roughly five times the country’s GDP, and income from these assets, probably underpins the strong evaluation from international rating agencies. The support of this robust fund and income is also behind the steady appetite for Kuwait’s debt instruments on international markets.

Since April 2016, the government has met around half of its funding needs through domestic and international debt issuance, including an inaugural $8 billion sovereign bond in March 2017. Overall government debt levels, in March 2018, still remain low at around 19 percent of GDP. Meanwhile, the government is still awaiting approval from parliament for a new draft debt law that could push the borrowing limit to KD25 billion from KD10 billion, and extend the borrowing period to 30 years from the 10 years under the current law.

However, optimism from higher oil revenues, trade surpluses and steady credit ratings does not hide the fact that sustainable economic growth still faces significant hurdles. Among the deterrents are lackluster economic reforms, the absence of any meaningful efforts to wean the market away from its over-reliance on hydrocarbons, a labor market where public sector continues to absorb the bulk of new Kuwaiti entrants to the labor force, and low-key private sector participation in the economy.

   

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