Kuwait has so far not been affected with any coronavirus infection and health authorities have reiterated that the country is well prepared to meet any medical exigencies. While the absence of coronavirus infections and the country’s preparedness are no doubt welcome news, Kuwait’s readiness to face the potential economic consequences arising from the infection, in particular, its impact on oil prices, is doubtful.
Fourth-quarter of 2019 witnessed the prevailing global economy gloom abate to a certain extent, with the ‘phase one’ trade deal between the US and China, and a boost in oil prices from an agreement by Organization of Petroleum Exporting Countries (OPEC), and several non-OPEC members, to deepen their production cuts by a further 500,000 barrels per day from January 2020. Consequently, oil prices ended 2019 on a strong footing and, in fact, recorded its best performance since 2016. However, hopes of a more buoyant global economic growth and higher oil demand in first-quarter of 2020 were dashed in the first week of January with the emergence of a new coronavirus infection in China and its rapid spread to several countries worldwide.
By the second-week of February, the virus had claimed the lives of over 725 and infected nearly 35,000. Most of those infected are in China and largely confined to the province of Hubei and its capital Wuhan, which was the epicenter of the infection. So far, except for two deaths reported in the Philippines and Hong Kong, all the other fatalities have been in China. As the world’s second-largest economy and the world’s largest importer of oil struggles to contain and overcome the infection, its economy is taking a battering, which in turn is impacting oil imports and global oil prices.
In 2019, China overtook the US to become the world’s largest importer of oil, importing a record 506 million metric tonnes, or around 10.2 million barrels per day. The country’s energy usage of an average 13.5 million barrels of oil per day, which amounts to nearly 15 percent of global usage, also made China the second largest consumer of oil after the US. More than 75 percent of China’s energy needs are met through oil imports, and over 45 percent of these imports come from six countries — Iran, Iraq and the four GCC states of Saudi Arabia, Oman, the UAE and Kuwait. No wonder then, every time China sneezes, oil exporters in the Gulf region catch the flu.
With the spread of coronavirus infection and rising death toll dampening oil demand from China and other countries impacted by the virus, OPEC and its new-found allies (OPEC+) have begun scrambling to hold up oil prices. In an attempt to salvage oil prices that have fallen by about 20 percent over the last month and now hovers around US$55 per barrel, OPEC’s technical committee met at the cartel’s headquarters in Vienna on 4 February and recommended an urgent additional 600,000 barrel per day production cut among the group.
In December 2019, the OPEC+ group had agreed to deepen production cuts by a further 500,000 barrels per day to take total cuts to 1.7 million barrels per day in the first-quarter of 2020, and for a reappraisal of the plan by the end of March. If the new curbs proposed by the technical committee are approved by OPEC+, this would bring total global oil production down by 2.3 million barrels per day since production reductions began in January 2017.
Kuwait Export Crude, which closed the year at $68.4 per barrel and marked a 31 percent hike year-on-year, has seen its price fall to $55.4 last week — a drop of nearly 20 percent from its high at the tail-end of 2019. Kuwait, which has generally over-complied with the previous output cut targets, has been set an additional production cut earmark of 55,000 barrels per day starting January. This would see the country’s total output fall to 2.67 million barrels per day, and if the technical committee’s recommendations are accepted, the country’s total production could fall even lower.
In January 2017, OPEC+ began cutting production to deplete global excess oil inventory and to raise prices, but so far, despite compliance by most members to production cut targets, prices have not risen to the extent that the cartel had hoped for. Faced with subdued global demand and continued strong growth in non-OPEC oil supply, especially from the US shale, the oil market is likely to remain well supplied in 2020 and benchmark Brent crude is expected to average $60 per barrel in 2020, lower than the $64 averaged in 2019.
The lower production and lower prices are a cause for concern to Kuwait’s new cabinet sworn-in in December, with Finance Minister Mariam Al-Aqeel already presenting a draft budget for fiscal year 2020-21 that projected yet another large deficit. The deficit of KD9.2 billion for the upcoming fiscal was higher than the KD8.27 billion deficit in the 2019-20 budget and marks the sixth straight year that Kuwait is being saddled with a deficit. Given the continued absence of a new debt law, the budget shortfall will need to be once again covered from the estimated KD21 billion remaining in General Reserve Fund (GRF), which is now expected to run dry by the next fiscal.
The parliament has been reluctant to pass the debt bill, which would allow the government to borrow on the international market. Instead lawmakers have insisted that the government stem corruption and rein-in expenses. While the government has in recent years been resolutely pursuing anti-corruption measures, and has displayed relative transparency in its transactions, any reforms to the public wage bill, which accounts for the largest chunk of government expenses, has been anathema to parliamentarians.
Unlike many of its neighbors in the six-nation Gulf Cooperation Council (GCC) bloc, Kuwait has also failed to make any meaningful reforms to rationalize its spendings on generous subsidies to citizens, or to introduce taxes such as a Value Added Tax (VAT) to buttress the State’s income. Oil revenue remains the main source of Kuwait’s income, and so economic growth and development in the country are inextricably linked to volatile oil prices on the international market.
Finance Minister Al-Aqeel has said the government “will fight for getting the debt law approved, as the cost of borrowing is less than the cost of withdrawing from the reserves.” But, with parliamentary elections scheduled for late this year, lawmakers are unlikely to discuss needed economic reforms that could impact citizens’ pockets, or approve the debt law before the 2020-2021 fiscal year, as many parliamentarians see the law as a useful bargaining tool to get the government to toe their line.
In a new report themed ‘The Future of Oil and Fiscal Sustainability in the GCC Region, the International Monetary Fund (IMF) opined that with the oil market undergoing fundamental changes, new technologies increasing the supply of oil from old and new sources, and the world gradually moving away from oil amid rising concerns over its environmental implications, the future will pose significant challenges to oil-exporting countries, including those of the GCC.
The report added that with global oil demand expected to peak in the next two decades, some GCC countries have begun reducing their reliance on oil and have been implementing necessary reforms to diversify their economies, as well as their fiscal and external revenues, but some countries are still dawdling with their reforms.
The Times Report
