Kuwait's recent indicators highlight challenges and potential

By mid-2016 the period of slow economic growth and falling government revenues that kicked off across the GCC in 2014 was widely thought to have reached an inflection point. The region’s economy is expected to gradually firm up over the medium term. In Kuwait, which like most of its neighbours experienced economic contraction in 2014 and 2015, the World Bank recently projected GDP growth of 1.3% in 2016 and 1.6% in 2017. Similarly, according to the IMF’s 2015 Article IV consultation for Kuwait, which was published in December 2015, GDP growth in the country is projected “to slow in 2015 and 2016 on account of slower consumption and private investment activity, and pick up to 3.5-4% in the medium term, supported by government investment in infrastructure and private investment”. In the first quarter of 2016, meanwhile, the National Bank of Kuwait (NBK) forecast real GDP growth of 2.4% for 2016 as a whole, rising to 2.5% in 2017, on the back of robust public expenditure and steady growth in consumption.

Ongoing Pressure

Despite this trio of optimistic forecasts, the six GCC member states continue to face a range of key economic challenges – not least, ongoing oil price stagnation, rising fiscal deficits and hurdles related to rapid economic diversification and labour reform. In the decade to 2014 Kuwait’s economy relied to an enormous degree on hydrocarbons revenues. In 2013 energy exports made up some 94.3% of the nation’s export bill, a figure that dropped only slightly to just under 94% in 2014. The country was therefore hit hard by the decline in the price of oil that began in mid-2014.

The impact of cheap oil on Kuwait over the past three years has in many respects transformed the country’s economic landscape, as it has other energy-exporting nations around the world in the same period. According to data from the Central Bank of Kuwait, the country’s export revenues dropped off by nearly half in 2015 to KD16.5bn ($54.6bn), down from KD29.5bn ($97.6bn) in 2014 and KD32.6bn ($107.8bn) in 2013. This decline was due almost entirely to the fall in oil prices. Indeed, in 2015 hydrocarbons accounted for nearly 89% of total exports, a marked improvement, albeit still highly concentrated.

Negotiating New Circumstances

The effects of declining oil revenues have been considerable. Kuwait, which boasts large fiscal reserves amassed over the past few decades, has been able to stave off the precipitous corrections that have hit some other nations in recent years. In this, the country is in line with its GCC neighbours. In an April 2016 statement delivered at an IMF conference in Washington DC, Obaid Humaid Al Tayer, the UAE’s minister of state for financial affairs, said: “Thanks to the prudent building of large buffers, many [GCC] countries are well positioned to pace their adjustment over several years and thus limit the impact on growth.”

Nonetheless, adjust the region must, as noted by the IMF and World Bank. Kuwait, in particular, has larger reserves than many of its neighbours. In July 2015 the government announced that at the end of the 2014/15 financial year, which began and ended at the finish of the first quarter, the country’s financial reserves reached a record KD179.2bn ($592.7bn). The bulk of this figure was split between the State Reserve Fund and the Future Generations Fund, both of which are managed by the Kuwait Investment Authority.

However, Kuwait does not plan to rely on its financial reserves to make up for lost hydrocarbons revenues. Instead, the government has announced a range of expenditure cuts and initiatives aimed at developing new revenue streams in non-oil industries, as part of what is widely considered to be an intensification of the state’s long-running economic diversification strategy. In the short term, this effort has manifested itself in the form of a rising budget deficit. The government’s 2016/17 budget, which was approved in January 2016, includes a deficit nearly 50% higher than the previous year’s. Ensuring that this deficit growth is reversed will require the state to cut costs and raise revenues considerably over the remainder of 2016 and the first quarter of 2017.

Slashing Expenditure

In recent years Kuwait has spent around KD6bn ($19.8bn) annually on subsidies, including KD4bn ($13.2bn) on petroleum products, according to December 2015 interview with Khalifa Mousaid Hamada, Kuwait’s under-secretary at the Ministry of Finance, by Arabic-language daily Al Qabas. Other goods and services that have traditionally benefitted from state subsidies in Kuwait include electricity, water, health care and education.

In late March 2016 the country’s Cabinet announced that electricity and water costs would rise considerably on a scale pegged to usage. For instance, in private homes the bill is expected to jump from the subsidised rate of KD0.002 ($0.007) per KW to up to KD0.015 ($0.05) per KW for dwellings that consume more than 9000 KW during a monthly billing period. The industrial sector, where monthly consumption averages 40,000 KW, will see rates jump from KD0.002 ($0.007) to KD0.010 ($0.03) per KW. To compensate for this increase in production cost, some manufacturers will likely raise their prices.

Implementing cuts to petroleum subsidies, meanwhile, has been more challenging in Kuwait than in other GCC countries. While the government fully lifted subsidies on some grades of fuel in 2015, including diesel and kerosene, in mid-2016 Kuwait still had the cheapest petrol in the Gulf and the fourth-cheapest globally. In June 2016 the government announced that it had budgeted KD238m ($787.2m) for fuel and gas subsidies for 2016/17, which suggested a considerable price hike on petrol some time soon.

Raising Revenue

Looking ahead, Kuwait, in conjunction with other GCC states, plans to institute a sales tax, the first of its kind in the region, by 2018. At a March 2016 MEED conference, Anas Khaled Al Saleh, deputy prime minster, minister of finance and acting oil minister, said: “All of us have decided to go for January 2018, although this has to pass through the National Assembly, so it may take time.”

The nation also increasingly plans to look to capital markets and tap the private sector to pay for new projects. The government has ramped up its efforts to carry out new projects on a public-private partnership (PPP) basis, with the Kuwait Authority for Partnership Projects overseeing a KD6bn ($19.8bn) PPP programme as of early 2016. The state also plans to maintain its substantial capital expenditures, which are seen as integral to supporting economic growth in the near term. In 2015 the country awarded contracts worth $31bn, and it had some $150bn in new projects in the development pipeline as of mid-2016, according to data from MEED Projects.

Looking Ahead

Though these plans have yet to be fully implemented, they have contributed to a steadily improving outlook across the region. Indeed, while the data and timelines differ somewhat, the economic outlook for the Gulf region as a whole, and Kuwait in particular, are currently more optimistic than at any point in the past two to three years. Perhaps the most commonly cited cause in Kuwait, as in other GCC member states, is continued high levels of government spending, particularly on infrastructure development. Looking further ahead, the development of the non-oil sector is also a major influencing factor on Kuwait’s prospects. Indeed, recent research by NBK forecasts non-oil GDP growth of 4.5% and 5% in 2016 and 2017, respectively, double the institution’s real GDP growth projections for those years.

Rising levels of consumption and private investment are also positive influencing factors on the regional economy’s outlook. In his IMF statement, Al Tayer said: “Oil-exporting countries in the GCC are facing unprecedented fiscal pressures from the protracted decline in oil prices. … Growth is projected to pick up in the region with the restoration of confidence and higher demand from trading partners.” As the IMF noted in its 2015 Article IV report, “Kuwait is facing the oil price shock from a position of strength.”