Strong consumer spending helped ensure economic growth in Kuwait this past year, although a slowdown in the energy sector meant the rise in GDP was modest. The outlook for the oil industry in 2014 is unclear, but there is an expectation that private consumption and the rollout of government infrastructure projects have the capacity to boost growth in the coming year.
According to an early-December statement by the IMF, Kuwait’s economy was projected to grow by 0.8% in 2013, down from 6.2% in 2012. The oil sector shrank by 2%, the Fund said, while the remainder of the economy expanded by 3%.
Looking ahead, there have been some mixed messages as to the country’s short-term economic prospects, mainly centred on varied predictions of the well-being of the energy industry. According to the Kuwait Finance House (KFH), the oil sector will grow by 4% in 2014, while the National Bank of Kuwait (NBK) expects a contraction of 4%. Their projections for the broader economy therefore also diverge, with KFH forecasting GDP growth of 5% and NBK predicting a slight decline, at -0.6%. The IMF, meanwhile, expects a rise of 2.6% this year.
At the centre of the discrepancy between the forecasts from NBK and KFH is a difference of opinion with regard to oil production. NBK projects a decline in output, while KFH has said it expects “resilient oil production”.
Kuwait averaged output of around 2.8m bpd in 2013, according to KFH, slightly off its maximum capacity of 3m bpd. The government has said it intends to lift production to 3.15m bpd by 2015, a step on the path towards 4m bpd by 2020.
However, OPEC has forecast demand for crude from its member states will fall in 2014, dipping from just under 30m bpd to 29.6m bpd, a drop that could affect sales.
According to NBK, the OPEC member states, including Kuwait, will cut production to keep prices close to $100 per barrel. In mid-January, Ali Al Omair, the minister of oil, said the government was aiming for prices in the range of $100 this year, but oil analyst Khaled Boudai told state news agency KUNA that prices could fall to as low as $80 in 2014. As of the end of 2013, Kuwaiti oil was trading at $107.42 a barrel.
While opinions differ regarding this year’s oil production and prices, there appears to be greater consensus on continued growth in the non-oil segment of the economy, driven primarily by private consumption and better implementation of the government’s development projects.
Consumers provided an important boost to the economy in 2013. An NBK report issued last year said point of sale transactions climbed nearly 18% year-on-year for the first six months of 2013 to reach $11.4bn. The bank attributed the increase to wage rises that came into effect at the end of last year; an increase in employment levels, with most jobs coming through the public sector; and strong consumer sentiment.
A decision by the government last April to write-off up to $2.6bn in personal debt also likely fuelled purchases, although in October the local media reported fewer than expected Kuwaitis had signed up for the programme, with around 16,500 of the 42,000 eligible individuals having registered to receive benefits.
Should consumer spending soften in 2014, a roll-out of public investment projects could pick up the slack. The government has been slow to realise its $107bn, five-year National Development Plan, approved in 2010, but there were signs in late 2013 that a few important projects were moving forward.
In December, the state signed an agreement with a consortium led by France’s GDF Suez for the financing of the Al Zour North Independent Water and Power Project, a 1500-MW gas-fuelled power plant and associated water desalination facility. During the same month, the Partnerships Technical Bureau also put out a call for bids on the $12bn Clean Fuels Project, which will see the upgrade of the Mina Abdulla and Mina Al Ahmadi refineries to increase their output to around 800,000 bpd, and the closure of the refinery of Shuaiba.
Expansion of Kuwait International Airport is also moving forward. The airport investment plan, which was first unveiled in May 2012, will include the construction of a $3bn, 130,000-sq-metre new terminal, while a further $3bn is earmarked for a runway expansion, enhanced control tower operations and the construction of a new cargo facility. In September 2013, the government said it would re-tender the terminal construction project, after previous efforts stalled in February.
The private sector is expected to contribute to the cost of some development projects, but the state will have to bear at least part of the expense. While Kuwait’s fiscal balance remains healthy for now, the IMF has said it could deteriorate within the next few years.
In early 2013 and again in October, the Fund said the rising rate of state spending, especially on subsidies and social support, would push the budget into deficit by 2018, with the gap between expenditure and revenue widening over subsequent years. In the first six months of fiscal year 2013/14, spending rose 52%, while income fell from $56.3bn to $55.6bn as oil prices eased, although the surplus for the six-month period was still nearly $40bn.
The coming year could see a degree of uncertainty hanging over the Kuwaiti economy, with issues beyond its control, such as global oil prices, set to have a very direct impact on rates of growth and revenue. As it will take some time for the full effect of the government’s investment programme to be felt, expansion could be somewhat constrained for 2014, just as expenditure is set to rise, which may put pressure on the government to tighten its welfare belt as the IMF and others have called for.
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