Higher international oil prices that prevailed through much of 2022 has seen revenue flows to the state treasury soar, giving Kuwait’s economy a much-needed boost. Analysts estimate that revenues will now exceed KD25 billion by the end of fiscal year 2022-23 that ends on 31 March, and that the windfall income will not only wipe off the projected deficit in the current fiscal, but also deliver a surplus budget for the first time since 2015.
Last November, the parliament belatedly approved the budget for fiscal year 2022-23 that envisioned a revenue of KD23.4 billion, expenditure of KD23.5 billion, and a deficit of KD100 million. The budget was based on the premise of oil maintaining an average price of US$80 per barrel for the fiscal year. However, the higher trend in oil prices that prevailed throughout 2022 has meant Kuwait’s actual realized surplus could be significantly higher than that projected in the budget.
The recent release of third-quarter Balance of Payments (BOP) data by the Central Bank of Kuwait (CBK) has also revealed the country’s current account for 2022 is on track to register its largest surplus in nearly a decade. The report noted that higher oil prices and oil production, as well as stable income from Kuwait’s overseas investments were the primary drivers of the record surplus of around KD15 billion accrued during the first three quarters of last year.
Lending further support to the optimistic view on Kuwait’s economy, the International Monetary Fund (IMF) in its assessment on the country’s finances noted that over the short-term, Kuwait was likely to maintain the upward trend in economic recovery that was witnessed in 2022. In its final communique, following a visit to Kuwait in mid-December, the IMF team stated that the overall real GDP growth, which rebounded from minus 8.9 percent in 2020 to 1.3 percent in 2021, is expected to increase further to above 8 percent in 2022
During the visit the IMF mission, which held discussion with officials from CBK, the Ministry of Finance, and assessed data from other relevant entities, concluded that despite potential downside risks from slowing global demand for oil, and externally-induced volatility in oil prices and output, the robust growth witnessed in 2022 could continue, although at a more subdued pace in the year ahead. The IMF explained that inflation has been contained through monetary tightening policies of CBK, and continued state subsidies and price controls had ensured limited passthrough of higher global food and energy prices to consumers.
However, the IMF cautioned that while higher oil prices and output in 2022 significantly improved the overall fiscal and current account surpluses in 2022, the outlook for 2023 is tempered with uncertainties and risks. Among the potential downsides from the external environment highlighted by the Fund were, the very real possibility of the current slowdown in global economic activity sliding into a full-blown recession in 2023, as well as fallouts from ongoing geopolitical crises.
Moreover, delays in implementing key fiscal and structural reforms, as identified by the Fund and other international and local economic entities, could hinder progress toward urgently needed economic diversification programs and amplify the risk of prevailing procyclical fiscal policies — such as the increasing spending witnessed during economic boom periods and the belt tightening during hard times.
Although the oil price hike witnessed in fiscal year 2022-23 boosted government revenue and helped the country maintain macroeconomic stability, it also highlighted Kuwait’s continued overreliance on fluctuating global demand and fickle international prices for oil to propel its economy. Additionally, the higher oil price based economic recovery witnessed in 2022, once again underscored the criticality of weaning the economy away from its overwhelming dependence on hydrocarbon reserves and revenues.
Nevertheless, buoyed by the surge in revenues in 2022 and continued high oil prices, the government was scheduled to announce a draft budget for fiscal year 2023-2024 that begins on 1 April. Plans in the new budget reportedly included increases in current expenditures in line with the government’s aim of improving the lives of citizens, and implementing of financial and economic reforms so as to diversify the economy, raise non-oil sector’s contributions to the budget and enhance competitiveness, as well as realign prices for public services to better reflect actual costs, introduce more efficient collection of state revenues, and reassess prices for lease of state lands and real estate, among others.
However, the hopes in political circles that the robust public finances would help the new government to usher in sorely needed policy changes and infrastructure projects, were dashed early last week. Last Monday, in a surprise move, His Highness the Prime Minister Sheikh Ahmad Nawaf Al-Ahmad Al-Sabah tendered the resignation of the cabinet to His Highness the Crown Prince Sheikh Meshal Al-Ahmad Al-Jaber Al-Sabah, citing the impasse in relations with legislative authority during the first session of the 17th legislative term of the National Assembly.
The government’s resignation, barely three months after its formation in October, was reportedly precipitated by opposition lawmakers pressuring the executive for a debt relief bill, under which the state would buy the personal loans of citizens, but which the government maintained was not viable. Parliamentarians had also sought to question two ministers over lapses in their respective ministries in the past. The cabinet’s resignation has once again stalled planned financial and economic reforms and policy changes, in addition to dampening enthusiasm and interest among local, regional and international investors to invest In the country.
In the meantime, on the global economic front, oil prices began 2023 on an upward trajectory, with markets expecting a ‘soft-landing’ for the global economy with inflation abating in several markets and oil demand growing, following China’s abrupt decision to make an U-turn and scrap its zero-COVID policy. The hope is that despite fears of global recession, the revival of the Chinese economy would help drive global growth and consequently oil demand in the year ahead.
Expectations of oil prices remaining in the higher spectrum throughout 2023 were also boosted on the supply side by the European Union’s (EU) decision to place an embargo on Russian oil, and the resolution by the group of G7 wealthy nations to impose a price cap of $60 per barrel on Russian oil exports from December, as well as an additional embargo on Russian refined oil products starting from February. Moreover, the reaffirmation by the Organization of Petroleum Exporting Countries (OPEC) and its non-OPEC allies to maintain their two million barrels per day (mb/d) oil production cuts throughout 2023, could witness a tightening of supplies and stabilizing of oil prices.
Prognosis of higher global oil prices over the next 12 months also found support from the potential decline in oil production in the United States, as evidenced by the fall in number of oil rigs operating in the country, which, at the end of 2022, dropped to their lowest levels since November 2021. Additionally, in the face of domestic and global economies roiling from the impact of aggressive rate hikes in 2022, the US Federal Reserve is likely to temper its next expected interest rate hikes on 1 February, by a smaller percentage point than the 0.25 percentage point hike predicted earlier.
Lower US interest rates make oil less expensive in other global currencies, which OPEC and other oil exporters hope could fuel a pent-up buying spree by countries that had delayed or limited their oil purchases in 2022. For their part, oil analysts, overly cautious when it comes to predicting global factors that could influence oil prices in 2023, said that Russian responses to the embargoes on its oil and oil products, as well as the commitment by OPEC+ members to conform to mandated production cuts,will be key determining factors in how oil prices move in 2023.
Russia has already announced that it will ban oil exports to any country participating in the G7 price cap and has also indicated it could reduce its oil outputs by up to 700,000 barrels per day in response. For its part, OPEC+ has reaffirmed its October supply cut decision and stated it would continue holding crude output down by 2 million barrels per day (bpd) throughout 2023.
Meanwhile, on the demand side, while the cold spell during winter in the northern hemisphere is expected to support consumption over the next few months, the trajectory for oil demand will be shaped more by global economic growth, and more specifically growth or the lack of it in its three main drivers, the US, China and Europe. For its part, the IMF in its forecasts on economies of the US, China and Europe, has already warned that all three are slowing simultaneously and that 2023 will be “tougher than the year we leave behind”.
In addition, while two wild-cards, Russia and China, could influence the global oil outlook in 2023, a third, unobtrusive, but nevertheless significant player, could be India, the world’s third largest importer of oil. Indian imports of oil are especially pertinent to oil exporters in the Middle East, especially Iraq, Saudi Arabia and the UAE, and to a lesser extent, Kuwait, which have traditionally been among the major oil suppliers to India. However, lured by the offer of Western-embargoed Russian oil at a discounted price, India has been steadily buying Russian oil in 2022. Indian record import of 1.9 mb/d of oil from Russia in December, made Moscow the top oil supplier to India for the third month in a row.
In the meantime, according to data from the latest ‘Oil Market Report’ by the International Energy Agency (IEA), global oil demand is set to rise by 1.9 mb/d in 2023, to a record 101.7 mb/d, even as world oil supply slows to 1 mb/d with an overall non-OPEC+ rise of 1.9 mb/d offset by an OPEC+ drop of 870,000 barrels per day, largely due to expected declines in Russia.
Given the overall uncertain outlook for oil prices in 2023, the question among many economic and political analysts in Kuwait is, whether the current political climate will enable the country to fully realize the potential gains that higher oil prices could portend in 2023, or whether it will be able to tide over yet another possible fall in oil prices and the likelihood of the world slipping into recession in the year ahead.
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