Global Investment House – Kuwait – Economic & Strategic Report- The year 2007 was another good year for the Kuwaiti economy that continued its stellar performance for the fifth year in a row since 2002. We estimate Kuwaiti economy would have registered a real GDP growth rate of 6.6% in 2007, on top of 6.3% growth rate registered for 2006. On nominal terms, GDP grew by 21.4% to reach KD28.6bn in 2006 and is estimated to have maintained the same growth pattern in 2007. On CAGR basis, nominal GDP grew by 25.4% during the four year period 2002-06. Consequently, per capita GDP is estimated to have grown by 12.4% by the end of 2007 reaching KD10,111 (US$35,564) up from KD8,999 (US$31,654) in 2006. However, it is important to note that, the high growth rates reported for Kuwaiti economy as well as for other GCC countries have been primarily due to the oil factor. The geopolitical factors, supply disruptions and increasing demand continued to push oil prices to new highs during the year to surpass US$100/b. Kuwait export crude was no difference thus continued to record new highs over US$90/b. The ongoing increased prices are directly reflected as increased revenues for government coffers.
Oil continued to play an increasing role in the Kuwaiti economy with around 50% share in GDP. Similarly, the budget continued to register surplus for the seventh year backed mainly by the increased oil revenues that accounted for more than 90% of government revenues. On the foreign trade front, oil exports continued to account for more than 90% of total exports. Such facts reflect the huge dependence on oil and the urgent need for diversification.
Thus, the oil boom continued to lead the Kuwaiti economy; however, everything comes at a price. The increased liquidity in the economy over the last years due to higher oil revenues and repatriation of funds from abroad had its impact. Money supply as measured by M2 has been growing at the highest annual growth rates ever reporting 21.7% and 19.3% annual growth for 2006 and 2007 respectively. Consequently, inflation kept on picking up over the last couple of years recording higher levels above 3% for 2005 and 2006 followed by all times high of 7.1% by the end of 4Q07 and even higher to 9.53% by the end of January 2008. Thus after being quiescent over the period 2000-04 hovering around 1% to 2%, inflation is currently a major concern for the Central Bank that is reviewing its monetary policy to face the looming threat.
However, it is important to note that inflation in Kuwait was demand pull inflation rather than speculative price increases. Inflation was mainly due to the increased demand for the growing economy at higher rates more than its production capacity can afford. As a result shortages are created which lead to higher price levels. Major part of such inflation could be traced back to the imported inflation effect due to the tumbling US$ to which the KD was pegged between 2003 to May 2007. Moreover, among different CPI categories, both “food and beverage” and “real estate and rentals” categories weighted the most within CPI accounting for 45% and encountered the highest inflationary pressures over the last couple of years.
Other factors exerting more inflationary pressures have been the lending spree and expansionary domestic credit facilities by domestic banks to residents that had much of impact in increasing liquidity in the system. Moreover, the US Federal Reserve decisions regarding its interest rates had exerted another pressure on the region’s currencies and inflation levels for the last period. This is especially after the sub-prime crisis and the fear of serious recession within the US economy.
From its part, the CBK has been doing the best at its disposal to squeeze the increased liquidity and to manage the inflationary pressures through available monetary policy tools at its discretion. Thus, the year 2007 will be a year to remember with major developments on the monetary policy front. The year witnessed the CBK de-pegging the KD from the US$ during May 2007. The new exchange regime tied KD to a weighted basket of international currencies according to Kuwaiti trade and financial relations with other countries. The move aimed mainly to curb the impact of imported inflation.
However, de-pegging form the US$ was not enough to manage the picking inflation levels and the ongoing increase in credit to residents. Thus entering 2008, the month of March witnessed CBK enforcing new banking regulations related particularly to the increased credit to residents. The increasing inflation was one of the major reasons behind the move whereby regulations have been tightened by restraining the banks’ lending or in other words by clipping the borrower’s borrowing capability.
Finally, it is no doubt that major challenges facing the Kuwait economy as well as other GCC members in the future would mainly be economic diversification, employment generation and increasing inflation. This is especially in the current scenarios of tumbling US$ as well as high population growth rates and skewness towards young population.
