THE TIMES KUWAIT REPORT
A symposium held last week by the Kuwait Economic Society analyzed the World Bank’s latest Global Economic Prospects (GEP) report, in particular the report’s assessment on the recent surge in global oil prices and its impact on the region, including Kuwait. Speaking at the meeting, economists and analysts agreed that the windfall in revenues would likely help Kuwait wipe off the deficit projected in its annual budget, and replace it with a surplus. The gathering also urged the government to ensure that the surge in funds were directed towards policies and projects aimed at sustainable growth and development of the country.
In its January Global Economic Prospects report the World Bank had stated that following a strong rebound in 2021, the global economy was entering a period of pronounced slowdown. The bank expected global growth to decelerate significantly from 5.7 percent in 2021 to 4.1 percent in 2022 and to 3.2 percent in 2023, as countries around the world wound up fiscal and monetary support measures and pent-up demand, which fueled much of the growth witnessed in 2021, began to dissipate.
But that was then, and before the outbreak of war in Ukraine. The latest Global Economic Prospects (GEP) report released last week, paints a far more stark prospect for the global economy than was projected in January. Global growth for the year is now projected at 2.9 percent, far lower than the 4.1 percent predicted in January, and about half of the 5.7 percent global expansion seen in 2021. Prospects for an early economic recovery are also dimming by the day as hostilities continue in eastern Europe, and the report now expects global growth in 2023-2024 period to be only around 3 percent.
At the same time global inflation has risen sharply from its lows in mid-2020, fueled by rebounding global demand after the COVID-19 crisis, continuing supply chain bottlenecks, and soaring food and energy prices. Though many markets and analysts are expecting inflation to peak by mid-2022 and then to decline, it is still likely to remain elevated even after external shocks subside, and even as global growth moves in the opposite direction.
The report also projected that economic growth worldwide, which has declined sharply from February, could remain below the average of the 2010s for the rest of this decade. In light of these developments, the risk of stagflation — a combination of high inflation and sluggish growth — has become a very distinct possibility, noted the report.
In his foreword to the latest Global Economic Prospects report, World Bank Group President Davd Malpass warned that unless major supply increases are set in motion, the world could be headed for a prolonged period of stagflation marked by high inflation and sluggish economic growth that could fuel unemployment, food shortages and global unrest. “Reversing the damage inflicted by the pandemic and a looming stagflation will require measures to prevent fragmentation in trade networks, invest in education and digital technologies, and promote active labor market policies,” wrote the World Bank chief.
While advanced economies have the funds, as well as robust processes and policy tools to endure and overcome a prolonged stagflation, the same cannot be said of most countries in the developing world. Repercussions from an extended stagflationary environment could prove to be disastrous for these countries, tipping millions of people back into poverty, and resulting in food shortages that could spur a new wave of urban protests around the world.
It is worth noting that the recovery from the stagflation of the 1970s required prompt intervention by major advanced-economy central banks to quell inflation, including through steep increases in interest rates. But these hikes in interest rates triggered a global recession and a string of financial crises in Emerging Markets and Developing Economies (EMDE)s. Under the prevailing global economic climate, growth in the EMDE bloc is now projected to roughly halve in 2022, slowing from 6.6 percent in 2021 to 3.4 percent. Per capita income growth in EMDEs are also expected to fall from 5.4 percent in 2021 to 2.3 percent in 2022.
Though technically considered an EMDE, Kuwait and other hydrocarbon exporters in the Gulf Cooperation Council (GCC) states have historically exhibited lower correlations with major emerging markets, and analysts opine that they should be considered a distinct sector within the larger EMDE bloc. Nonetheless, the latest GEP report on its coverage of the Middle East and North Africa (MENA) region, which includes the six GCC countries, points out that higher oil prices are expected to be transitory and would not be sufficient to cushion the blow from continued structural weaknesses exhibited by many countries in this region.
The report also notes that while higher oil prices could mean an estimated 5.3 percent growth rate for the region — the fastest growth rate in a decade, and more than twice that of the global forecast — this growth could be spread unevenly among individual states in the region, with the existing divide between oil haves and have-nots in the regionexacerbating.
In a separate assessment of Kuwait’s economic prospects going forward, analysts at National Bank of Kuwait (NBK), country’s premier private lender, in their latest quarterly review, noted that despite fresh shocks to the global economy from the Ukraine war and lockdowns in several Chinese cities from COVID-19 infections, overall Kuwait’s economy appears to be in a far stronger position than it was a year back, or even as late as the start of this year.
The bank added that the government could look forward to posting its first fiscal surplus since 2014, of 8.8 percent of GDP. The report also forecast that GDP growth in 2022 is now expected to be 8.5 percent; up from 7.0 percent forecast earlier. However, NBK analysts also warned that despite these pluses, downside risks remained prominent. Among the downside risks are that the oil price hike could be of limited duration; the supply chain bottlenecks or breakdowns from high prices could be more lasting and disrupting to the market. Food insecurity arising from evolving geopolitical situations could also impact the country, given its overwhelming dependence on imported food supplies. Moreover, higher inflation and any monetary tightening to curb rising inflation, could erode purchasing power, elevate borrowing costs, and deepen uncertainty and volatility in the market.
Adding to Kuwait’s woes, the local political situation continues to remain in a state of flux, with no government in place, and the caretaker cabinet reluctant to take on and tackle the long list of economic and social issues that need to be addressed urgently. With no one apparently at the helm, the country continues to drift along while the all-important structural reforms needed to boost the long-term growth of the economy remain unheeded. Nevertheless, with oil prices waltzing over the US$100 mark and likely to head higher, Kuwait can afford to drift aimlessly, at least for a while longer.
While OPEC+ could potentially ease the current high-price situation, it has stuck to its schedule of incremental monthly output gains. The group remains reluctant to change track, not only from the flood of cash flowing into their respective national coffers, but also to avoid upsetting Russia. In recent months, despite the slew of sanctions imposed by Western powers, Russia has been raking in billions each month from its gas and oil sales. Ironically, many of the countries that have slapped the tightest sanctions on Moscow, are the same ones buying the largest volumes of gas from Russia.
While it has become politically-correct and fashionable in media circles and among so-called ‘experts’ to blame Russia’s invasion of Ukraine for the current surge in global oil prices and food shortages, this is only part of the story. Prices were already heading north before hostilities erupted in late February, with a series of catalysts prodding crude prices ever higher in recent years. Even before global oil prices plummeted during the COVID-19 period, energy producers had been cutting back on investments and projects deemed unessential, amid increasing competition, decreasing revenues, and rising shareholder pressure for higher returns.
Also, in response to the precipitous fall in oil prices — from dropping demand for oil as a result of economic downturns and social repercussions of the pandemic — many energy producers slashed output further. Then came the rollout of preventive vaccination against COVID-19, and as they became more readily available, economies began to reopen, manufacturing revived and people began moving about more freely. The renewed activity led to a surge in demand for oil, just when most producers were ill-prepared to respond with increased production.
Constrained refining capacity is also a major factor in the current oil price surge. Refining turns crude oil into the petroleum products consumers and businesses use daily. The amount of oil that refiners can process has fallen since the pandemic, especially in the United States and in countries where regular maintenance and upgrades to refineries have not kept pace due to economic and political exigencies.
Available global refineries are reported to be operating at nearly full capacity, and ‘crack spreads’ — an oil-industry jargon for the difference in price to refineries between cost of oil and price they sell their refined product — on diesel are said to be at record levels. However, this is less of an influence where the state is both the producer of oil and the refiner of its derivatives, such as in Kuwait and other GCC states.
The decision by OPEC+ countries to continue with their organized production cuts, did not help balance demand and supply, but rather tilted it in favor of higher prices, and an increasingly tight global oil market, over the last six months in particular. The ongoing war in Ukraine only helped push an already fragile oil market into further volatility.
Analysts now believe that ‘demand destruction’ — an economic term used to describe the level at which high prices influence consumer behavior — is the only way that current surge in prices could be tamed. This demand destruction may not have set in, at least, not yet on a wide scale, but higher oil prices are slowly percolating down throughout the economy and increasing production costs to businesses everywhere.
Eventually, the higher production costs are going to be passed on to consumers, and gradually the volumes needed to spur a demand destruction among buyers could be triggered, which could then result in an easing of price hikes, or even precipitate a steep fall. The current surge could also provide the impetus for oil importers, especially in developed countries, to begin shifting from fossil fuels to renewable energy sources that promote energy sustainability and efficiency. Cynicists may add that unlike oil prices, there is no price surge to dreaming.