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Kuwait well positioned to weather lower oil prices


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Oxford Business Group, 7 January 2016

The need for economic diversification was underscored this past year as the Kuwaiti economy came under pressure from lower oil revenues.

However, the country remains well positioned to weather both lower prices and global volatility and continues to benefit from a healthy banking system, rising public spending on new infrastructure, and foreign direct investment (FDI) reforms aimed at improving investment inflows.

Falling forecast
In April 2015 the IMF World Economic Outlook Report projected Kuwait’s economic growth would reach 1.7% in 2015 before rising to 1.8% in 2016. However, in its most recent World Economic Outlook, released in October, the organization revised its forecast slightly downward to 1.2% in 2015, but predicted growth would recover to 2.5% by next year.

The slowdown is largely attributed to falling oil prices. Still, the government continues to benefit from relatively high financial buffers, which are enabling increased public investment in infrastructure – a key factor expected to support non-oil growth in 2016 and beyond. Indeed, the IMF expects non-oil GDP growth to roughly double the pace of overall expansion over the medium term as the impact of recent investments takes effect.

Oil impact hits hard                                                         
Kuwait’s fiscal position has deteriorated notably as a result of lower energy prices, declining from a surplus of 11.7% of GDP in 2013/14 to a deficit of 4.4% in 2014/15. After compulsory transfers to its sovereign Future Generations Fund, and excluding investment income, IMF projections indicate the country’s overall fiscal balance narrowed from a 34.7% surplus in 2013/14 to 17.3% in 2014/15.

Despite promising developments in government spending cuts – including reductions in costly fuel, water and electricity subsidies, as well as travel and other allowances for government employees and payments to Kuwaiti nationals seeking medical treatment abroad – the country’s current account surplus has continued to decline, largely as a result of remaining subsidies. The IMF predicts Kuwait’s current account surplus will shrink from 31.2% of GDP in 2014 to 10.2% and 8.9% in 2015 and 2016, respectively, before recovering to around 11.3% in 2017.

Capital markets slump but banks stay strong
Capital markets also faltered over the course of the year, with prices on the Kuwait Stock Exchange (KSE) dropping by 16% year-on-year as of the end of August, reflecting weakening demand in China, falling commodities prices and global volatility. Since the beginning of 2014 at least 24 of the KSE’s 211 listed firms have announced plans to delist, with another five companies delisted by the authorities due to inactivity and accumulated losses. According to bourse authorities, the total value of traded shares fell by 12% to KD2.45bn ($8.06bn) during the first half of the year.

However, the state’s well-regulated banking sector has remained resilient, with the IMF reporting sector-wide capital adequacy of 16.9%, a 2.8% non-performing-loan ratio, and a provisioning ratio of 172% as of the end of June 2015.

Construction, non-oil growth to lead in 2016
With the country’s non-oil economy continuing to lead growth, the government released the latest five-year economic development plan in January. Although a detailed implementation strategy has yet to be released for the scheme, which will run through to 2020, the vision includes KD34.15bn ($112.4bn) in infrastructure spending, improved economic diversification and regulatory reforms to attract investment and boost private sector participation in the economy ¬– all of which could push Kuwait towards more robust economic growth in the coming year.

Construction spending is expected to continue its forward momentum in 2016, with investment firm Alpen Capital reporting in June that at $123.6bn, the value of Kuwait’s ongoing construction projects ranked third highest in the GCC in 2014. According to the report, the country’s infrastructure sector was on track to grow by an estimated 15-20% in 2015 as a result of efforts to upgrade transport networks and deliver government-funded housing – with a new metro system and 45,000 housing units laid out under the latest five-year plan.

As of mid-October, some $30bn worth of projects had been awarded year-to-date, according to MEED, compared to $24bn in all of 2014, for a combined $251bn worth of builds either planned or under way.

FDI reforms
Perhaps most promising for the nation’s future economic growth, however, was the release in December 2014 of regulations clarifying the 2013 Direct Investment Law. The executive regulations, which are the final step in the law’s implementation, include efforts to reduce red tape and lengthy procedures by establishing a one-stop shop for licensing businesses.

Five months after the announcement, US tech giant IBM announced it had received the first license to establish a 100% foreign-owned Kuwaiti company under the new law, suggesting the government’s approach to attracting FDI is already paying dividends.
Oxford Business Group
7 January

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