From 2020 until February of this year, things were rather bleak for Kuwait. Like other countries, Kuwait and its economy have suffered from the COVID-19 pandemic. However, unlike most developed countries, Kuwait had few alternative economic activities to mitigate its near-absolute dependence on oil.
Euromoney says wealthy Kuwait has amassed ample reserves for decades, but when oil prices fell in early 2020 as energy demand slumped around the world, the extent of the state’s mismanagement of the economy and those reserves in recent years was exposed, reports a local Arabic daily.
It is unimaginable that one of the world’s richest countries needed to manage successive budget deficits in addition to accumulating huge debts and debt securities within a cohesive network of state institutions in Kuwait. All this before the pandemic-induced downturn adds to the pressure on the country.
That sounded alarm bells across the country, and in 2020 an influential group of Kuwaiti economists argued in a widely publicized explosive paper — ‘Before it is too late — that Kuwait desperately needed to diversify away from dependence on the oil resource.
But things soon changed in April 2022, but not in the way angry Kuwaiti economists had predicted, or the way Kuwait’s long-term sustainability would be preserved.
After Russia invaded Ukraine in late February of this year, the price of oil has more than tripled from what it was in 2020. The energy price hike that began in 2021— and reached $132 — could coincide with the COVID-19 vaccination programs that helped fuel the outbreak.
According to the magazine, it appears that Kuwait, like its oil-rich neighbors in the Gulf, has been given a respite from the difficult situation that was expected.
This rise in oil prices could not have come at a better time for Kuwaiti banks, which succeeded in overcoming the Corona crisis, and achieved stable profits at best during 2020 and 2021 as they cut expenses and focused on digital operations to help withstand the downturn in the economy with the sharp rise in oil prices after the Russian invasion in February, banks are up again well.
And the rating agency “Standard & Poor’s” said about the banking sector in one of its reports: “Macroeconomic expectations, and rising oil prices and interest rates, are paving the way for the recovery of Kuwaiti banks.” It expects the profits of Kuwaiti banks to fully recover in 2022.
Banking Leadership
Kuwaiti banks have been the region’s profit leading so far this year compared to their peers in the GCC economies. Industry analysts at EFG-Hermes expected that Kuwaiti banks in 2022 would record a profit growth rate of 33 percent when measured annually, compared to 21 percent for UAE and Qatari banks, and 15 percent for Saudi banks.
Professor Saad Al-Nahedh from the College of Administrative Sciences at Kuwait University says: “The banking system in Kuwait is very strong, it is excellent. Profits are good and growing, non-performing loan rates are at historic lows, and banks are now very well capitalized.”
EFG-Hermes said that preparations to improve profits in Kuwaiti banks were made in the second half of 2021, when provisions decreased as credit quality improved. This choppy business bodes well for the sector through the remainder of 2022, with improved consumer spending driving loan growth.
What is happening in the banking sector also applies to the rest of the economies. After the gross domestic product in Kuwait decreased by 8.9 percent in 2020 during the worst periods of the pandemic and even grew by an estimated 1.3 percent in 2021, according to the International Monetary Fund, the local economy is expected to achieve a strong recovery and grow by 8.2 percent. percent.
Economists at the National Bank of Kuwait are more optimistic, as they expect GDP growth this year by 8.5 percent on the back of higher oil production and prices.
But after the bleak outlook for Kuwait’s economic future painted by that group of economists in 2020, is the good news all this year an illusion, a sunny period of prosperity before storms gather again over Kuwait?
Al-Nahedh expresses his fears that it will be. “The war in Ukraine, although unfortunate, led to high oil prices, but not to the dramatic point of being safe and covering up the problem,” he says. We are still on the verge of being able to barely cover the budget deficit. I did buy some time, but it’s not meaningful enough to make any difference.”
Al-Nahedh is concerned that the fundamental flaws in the Kuwaiti economy that prompted him and his colleagues to issue their warning in 2020 have not changed much simply because Russia decided to go to war and change the global economy in the process.
He worries about laxity and imbalance in official priorities. The price of oil from $75 to $80 a barrel is much better than $30 and $40, but since the oil price hike, unfortunately, the need to address these issues has become less of a priority.
He adds, “The numbers are back to normal, and even better than the past two years.” But again, this is only due to the recovery in oil prices.
Structurally, I think we still face the same issues that were highlighted (in the 2020 paper) that became important during the height of the pandemic.
Yes, on the surface it looks fine in terms of balancing the budget, but the underlying mechanisms or the underlying roots of the problem, I think, are still there.”
In their paper for 2020, the economists warned that Kuwait’s wealth is threatened by the indifferent “rentier culture”, and they touched upon that “the abundant privileges that generations of Kuwaitis have become accustomed to since the discovery of oil are threatened with extinction, warning that diversification is necessary and urgent, and that the Kuwaiti economic model was Unsustainable.
Reliance on resources
Kuwaiti economists argue that the Covid pandemic is a problem that can be overcome in the short to medium term, but what is the most dangerous is Kuwait’s lack of economic diversification and how the state manages the reserves that have accumulated from oil revenues over decades.
Al-Nahedh says, “Nothing has changed since then. Frankly, what sustains the economy, at least in terms of credit ratings, is that we have good foreign reserves, the highest foreign reserves to GDP ratio in the region.”
It is estimated that about 60 percent to 70 percent of Kuwait’s oil revenues are spent on supporting the bloated state sector, which is the largest employer in Kuwait.
What was happening was that the government was in dire need of a monetization of assets in order to pay off its obligations, be it salaries, capital costs, or binding operating expenses.
However, the rise in oil prices this year made it easier for the authorities so that they did not have to liquidate assets to pay salaries.
“It’s like a very rich man, but his money management is bad,” Al-Nahedh says.
On the other hand, the magazine considered that recent initiatives by the Kuwait Capital Markets Authority to promote the local debt market are encouraging.
“This might make things a little better for the private sector in terms of collecting debt to the government, [but] again, these things only address the symptoms but not necessarily the root cause of the issue,” Al-Nahedh says.
Al-Nahedh welcomed the appointment of Basil Al-Haroun, the new governor of the Central Bank of Kuwait, who may face challenges when high oil prices stabilize.
He said, “They realize that this [price hike] is temporary and that the next governor will face a greater challenge if the oil price goes down or even if it stays the same, because expenditures are naturally growing. At some point, they will have to liquidate more assets or draw from reserves.”
He added that there are also still issues that have been postponed from the pandemic. There has been very slow progress in diversifying the economy away from dependence on the oil supplier.
“There has been some improvement in that, but not so much that I would call it a proper diversification,” he says.
Appropriate diversification, which means finding resources other than oil to generate revenue, whether it is tax, through foreign inflows or even making the economy competitive in terms of exports, has not quite done so to the extent that I would call it diversification.”
Al-Nahedh cited the imbalances in the labor market, saying: “A lot of foreign workers have left since the pandemic, due to the restrictions that were imposed at the time and the closures. Now, many companies and institutions basically do not have employees.”
Political status
The magazine refers to the political instability that casts a shadow over everything in the country, which was represented in the resignation of the current Kuwaiti government in early April, and it is the third government to resign within one year, which highlights the deadlock reached in the relationship between the government and the National Assembly, which hinders efforts to conduct Fundamental economic reforms.
The magazine pointed out that the confrontation between the two authorities affected Kuwait’s ability to offer bonds in the global market, which has been suspended since 2017, after the expiry of the Public Debt Law and the failure of the two authorities to agree on the adoption of an alternative.
This, in turn, affected Kuwait’s sovereign rating, as happened when Fitch in January downgraded Kuwait’s rating from AA to AA-.
This negative impact extended to the banking sector with Fitch’s downgrade in February of the issuer’s long-term default ratings of 11 Kuwaiti banks due to what it said were political failures affecting the economy.
Despite its expectations that the rate of non-performing loans and the cost of risk will “gradually return to what it was before,” Standard & Poor’s expresses similar concerns about the impact of the political stalemate on banks.
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