Kuwait Needs To Bolster Non-Oil Economy To Maintain Growth In 2019

Economic Update: Middle East Q3 2019, produced in partnership by ICAEW and Oxford Economics, says the economic outlook for Kuwait remains closely tied to the recent oil developments. With the oil sector accounting for well over 50% of Kuwait’s output, the oil sector expansion slowed to around 1.3% in Q1, from 2% in Q4 2018. But non-oil activity strengthened to 4.1% - significantly above the 1.5% growth recorded in the preceding quarter, lifting Q1 GDP growth to 2.6% y/y from a downwardly-revised 1.8% in Q4 2018.

Kuwait has maintained its tight compliance with mandated supply cutbacks. According to the Economic Update report, oil output is expected to average around 2.7m barrels per day (b/d) for the remainder of the year, representing a 1.3% decline compared to 2018. However, in 2020, oil output is forecast to grow by 0.6% if OPEC+ cuts conclude on schedule, although OPEC’s next moves are uncertain.

On the other hand, the non-oil economy is showing signs of recovery – accelerating to 3% this year, spurred by an expansionary government budget and accommodative monetary policy. The evolution of credit growth, which averaged 5.2% in the first half of the year, was boosted by an improvement in business lending, low inflation (0.7% in the same period) and potentially lower interest rates. These factors suggest the private sector will spend more in the coming months, despite recent weakening in confidence.

According to the report, GDP growth is expected to drift downward in the second half of the year, averaging 1.2% for the year, in line with the pace registered in 2018. Growth should then rise to 1.7% in 2020 and stabilise around 3% in 2021−22. But risks to the medium-term projections lie to the downside. Lower oil receipts will limit the government’s ability to maintain stimulus beyond year-end, a traditional growth driver.

The oil trends also threaten deterioration in the external and fiscal dynamics, leaving the economy more exposed. Lower oil exports, which accounted for 90% of total exports, will challenge the government’s fiscal position. The budget gap narrowed to 3% of GDP in 2018, from 9% in 2017, despite a faster than expected increase in government spending of 13.5%. The lower oil revenues are expected to widen the deficit this year. This will require further drawdown of the country’s savings as the debt law, which would allow sovereign bond issuance, has expired. The implementation of the selective tax (soft drinks, cigarettes, tobacco) and the value added tax (VAT), has been postponed until 2020 and 2021, respectively.

Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “In order to build a sustainable and competitive economy, Kuwait must overcome the challenges posed by oil pressures by increasing its revenue base beyond the sector. The economy looks stable in the short term, but will be heavily reliant on the non-oil economy moving forward.  Regulatory reform and privatisation efforts will be crucial to improve the business climate and increase FDI.”

Project awards picked up modestly in 2019, driven by the construction and transport sectors. While historical trends suggest progress will likely be slow and subject to delays, the Silk City plan, which encompasses major infrastructure initiatives including a new port, and a number of residential projects, developed under the auspices of the New Kuwait 2035 strategic vision, have shown steady progress. Meanwhile, the revamp of the stock market has culminated in a reclassification of the Kuwait bourse from frontier to emerging market status, set for May 2020. This aims to support liquidity, particularly if complemented by further legal and regulatory reforms, such as a bankruptcy law.

Middle East economic growth to decelerate further in 2019 

The outlook for the Middle East economies remains clouded by tough US sanctions, maximum pressure policies against Iran and steep oil production cuts. In 2019, the Middle East economies will slow to a more-than-a-decade-long low, growing by only 0.1%, down from an estimated 1.4% in 2018. Aggregate oil production in the GCC, Iran and Iraq dropped from 24.8m barrels per day (b/d) in the first half of 2018 to 23.9m b/d over the same period in 2019, representing a 3.6% contraction.

Mohamed Bardastani, ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “Continued uncertainty in the global oil market paired with geopolitical tensions, involving Iran especially, has meant that in 2019 the Middle East economy is experiencing its lowest growth in over a decade. The slowdown, largely driven by the impact of two of the largest economies in the region – Saudi Arabia and Iran, will hopefully be softened by the improvement of the non-oil private sectors across the region.”

Elsewhere in the region, Iraq’s economy is expected to accelerate to 2.7% this year, up from a contraction of 1% in 2018, against a backdrop of improving security conditions and rising oil production. Bahrain’s economic growth will slow marginally to 1.6% in 2019 as the government continues to implement sizeable fiscal consolidation measures, while relative improvements in exports, tourism and remittances will push growth in Jordan and Lebanon to 2.3% and 0.8% respectively.