Kuwait: Boosting capital spending

As hydrocarbons’ contribution to Kuwait’s GDP is predicted to fall this year, growth is increasingly seen as hinging on the success of an ambitious state investment programme. However, concerns over delays to its implementation have raised questions as to how significantly it will boost GDP.

In late March the Central Bank of Kuwait (CBK) issued its latest outlook report and predicted that real economic growth would come in at 1.9% in 2013, compared with the 6.3% recorded in 2012. The CBK said it expected the hydrocarbons sector’s contribution to GDP to contract by 3.4% this year, compared with the 8.2% expansion in 2012. Last year, with energy prices rising and production at near capacity, oil GDP grew by 15%, following on from the 10% increase in 2011. On the positive side, the CBK predicted non-oil GDP to expand by up to 5.3% in 2013, in part a reflection of higher state infrastructure spending.

The IMF has also reassessed its forecast, announcing in early April that it had lowered its GDP growth projection from 1.8% to 1.1% for 2013. According to the IMF’s representative in Kuwait, Ananthakrishnan Prasad, the delayed implementation of the national development programme has slowed non-oil economic expansion, but he added that the fund expects more rapid progress in 2013. Indeed, the IMF has projected 4% non-oil GDP growth this year, compared to 2.7% in 2012.

Should Kuwait hasten the roll out of its capital works projects, the effect could be significant. In the budget for the 2013-14 financial year, which began on April 1, the government set out an infrastructure programme worth $17.5bn, part of a much wider $110bn development plan first approved in early 2010. The plan comprises, inter alia, increased investment in the transport, communications and energy industries, including, in the latter case, a $14bn oil refinery.

However, last year’s performance suggests that Kuwait may have difficulty achieving its spending goals. For the first 10 months of the 2012-13 financial year, which concluded on March 31, Kuwait posted a $60.5bn surplus, according to data issued by the Ministry of Finance at the end of that month. While some of this was a result of higher than forecast oil prices, lower than projected state spending also played a part in bolstering the budgetary balance.

Revenue was 11.6% up on the same period for 2011-12, and almost double the budget projections for the entire fiscal term. While earnings were up, on the back of higher oil production and above expected prices, state spending had fallen well short of projections, with outlays less than half of the budgeted $48.8bn. With recurrent spending – which reflects wages, pensions and social support projects – taking up much of the expended outlays, it is clear that the government’s capital works programme fell well behind schedule in 2012-13.

At least part of the reason for the delayed roll out of projects has been laid at the door of Kuwait’s political opposition, which blocked many of the major projects in the investment programme, and even forced the cancellation of the refinery in 2008, though it was later reinstated. However, with the opposition having boycotted the general elections of December last year over objections to changes to the electoral laws, the government has a more supportive legislature, one less likely to stall spending programmes.

If so, it will be a welcome development for many in the private sector. The IMF has said the low volume of public spending also resulted in the private sector being slow to invest in 2012, suggesting a wariness on the part of banks and businesses to commit too deeply to investments in an climate of economic uncertainty. A similar failure to undertake development projects in a timely manner this fiscal year could again discourage private sector investment and limit loan growth. Some of the country’s banks, having complained of the slow pace of implementing the investment programme, have restricted investment and lending opportunities, local and international media have reported.

While banks and private sector players would welcome more a more rapid implementation of the state development programme, investors will be mindful of the extended planning, tendering and approval processes that could moderate the flow of project roll out.