Political instability halts development projects in Kuwait
Kuwait’s GDP has been forecast to grow 1.1 per cent in 2013 as oil prices and production stabilises, exports remain subdued, and government expenditure slows down
Kuwait's GDP is estimated to have grown 5.1 per cent to $173.4 billion in 2012, lower than 6.3 per cent in 2011, said a press release published on Zawya. “This growth has been primarily due to the continued increase in oil output, resurgence in the non-oil sector, and improved public and private consumption levels,” it said.
“However, the political instability halted many developmental projects, thus putting an adverse impact on the economic growth. The oil sector is expected to grow 8.5 per cent in 2012, after a record performance (14.2 per cent growth) in 2011.
Private consumption is estimated to expand twice as fast (5.0 per cent) versus the last year, boosted by high income levels and strong demand for imported goods. Growth in non-oil sector is projected to increase 5.5 per cent in 2012, a major rebound from a mere 0.9 per cent growth in 2011.
“Going forward, the pace of economic activity will be largely determined by the speedy implementation of the four-year Development Plan with projects worth more than half the size of the current nominal GDP.
GDP growth is likely to be modest (1.1 per cent) in 2013 as oil prices and production stabilizes, exports remain subdued, and government expenditure slows down.
Nevertheless, capital formation is expected to rise 6.1 per cent in 2013, and continue to increase till 2017. Non-oil sector would continue its current growth trajectory, whereas private consumption is projected to grow 4.9 per cent in 2013, accountable to wage growth and continuing demand for imports.
“A young population and growing labour force create demand for public sector jobs Kuwaiti population, which grew at a CAGR of 3.5 per cent in the last decade, is expected to decelerate to 2.2 per cent in the current decade.
Population under the age of 60 is expected to decline from 96 per cent in 2012 to 94 per cent by the end of the decade. Meanwhile, the proportion of the population above the age of 60 is expected to increase to 6.0 per cent by 2020, from 4 per cent in 2012; this population is expected to grow at a CAGR of 5.5 per cent till 2020, more than twice as fast as the growth (2.5 per cent) in the previous decade.
Population below the age of 60 is projected to grow at 2.0 per cent per annum till 2020, vis-à-vis 3.6 per cent p.a. in the last decade.
“With a relatively young population (54 per cent of the Kuwaiti population is under the age of 29), Kuwaiti labour force grew at a faster rate than the total labour force and the non-Kuwaiti labour force. Kuwaiti labuor force grew at a CAGR of 1.7 per cent in the last 4 years as compared to a decline of 6.1 per cent in non-Kuwaiti labour force. This rapid growth has put increasing pressure on public sector employment, as Kuwaiti's perceive public sector jobs to be secure and well-paid with fewer working hours. Kuwaitis held 71.0 per cent of all public sector jobs in 2011 as compared to just 5.0 per cent in private sector.
“Despite a move towards diversification, external balances remain firmly linked to oil Trade surplus will be driven by increasing oil exports that account for over 90.0 per cent of the total exports. Trade surplus is projected to rise 27.3 per cent to $98.4 billion in 2012 on account of a 76.3 per cent increase in 2011. Oil exports are expected to increase 18.3 per cent to $114.4 billion in 2012, while non-oil exports are expected to register 12.3 per cent rise to $7.3 billion in the same period. Crude oil exports rose as, among the OPEC members, Kuwait was one of the few countries with spare production capacity to deal with the supply shortage arising from Libya's civil unrest in 2011 and Iran's sanctions in 2012. Trade surplus would remain high in 2013, representing half the size of GDP, despite a moderation in Kuwait's oil production as a result of increasing supply from Libya and Iraq. Trade surplus is projected to decline 10.3 per cent to $88.3 billion as oil exports fall 7.9 per cent for the year.
“Current account will continue to register healthy surplus as robust trade surplus is expected to offset the non-merchandise deficit. Current account surplus is expected to rise 26.9 per cent to $86.4 billion or 44.2 per cent of GDP in 2012, despite a 26.0 per cent increase in services deficit. Current account balance is expected to register surplus in 2013, led by high oil revenue from exports which would offset marginally the increase in imports and a steady non-merchandise deficit. Similar to trade surplus, current account surplus is projected to fall 11.8 per cent to $76.2 billion or to 39.5 per cent of GDP in 2013.
“Portfolio investments abroad would continue to remain volatile due to the government recycling excess oil revenues to invest in foreign equities and bond instruments. Investment in foreign instruments is expected to rise 80.0 per cent to $16.2 billion in 2012; however, it is projected to fall by half in 2013, because the government spending is anticipated to increase as the current development plan gets underway. Other investments, which constitute net overseas loans and investments in shorter-term deposit accounts, are expected to more than double to $62.0 billion in 2012 from 2010. Other investments would continue to stay high at $60.6 billion in 2013.
Inflation under control following an ease of food prices and housing rent
Growth in consumer price index (CPI) decelerated in 2012 as inflation rose just 2.9 per cent compared to 4.7 per cent in 2011. Inflation slowed in all four quarters in 2012, particularly in the second quarter, when there was no change in the CPI. The slowdown was also pronounced in the third quarter, when CPI rose by a mere 0.7 per cent as compared to 1.0 per cent in the same period last year. Moreover, lower inflation signaled by an easing of food prices, rents, and household goods and services component, which represent close to 60 per cent of the index. Inflation for 2013 is expected to register a 3.3 per cent growth, averaging 3.8 per cent between 2013 and 2017 on limited upward price pressures on food and rents.
Meanwhile, wholesale price index (WPI) also showed signs of weakness, rising 1.5 per cent 2012. Import prices, constituting close to 65 per cent of the WPI, registered smaller increase of 1.6 per cent in the same period, compared to 3.2 per cent in 2011. Local prices, which constitute the remaining 35 per cent, rose 1.6 per cent. A strong US dollar versus the Kuwaiti Dinar played a significant role in reducing the cost of imported goods in the second half of 2012.
Interest rates are expected to track the US Fed rate and are likely to remain low
Monetary policy and liquidity conditions in Kuwait will continue to remain largely accommodative. Given the currency peg between Kuwaiti Dinar and the US dollar-dominated basket of currencies, policy interest rates are expected to track the US Fed rate and are likely to remain low. Broad money supply (M3) grew 5.2 per cent in 2012, led by double-digit growth (18.3 per cent) in demand deposits, which in turn resulted in M1 growth of 16.8 per cent and a moderate increase (1.7 per cent) in quasi-money. Going forward, money supply is expected to increase by 11.6 per cent in 2013 owing to a shift in trend as quasi-money increases by double-digits (14.1 per cent), while M1 grows by 4.3 per cent.