A report issued by KFH-Research revealed that the expected growth rate of Kuwait’s GDP in 2013 is 4.5% and 5% in 2014, in addition to expectations of moderate growth in the production and exportation of oil. The report added that the momentum of growth of the non-oil sector that remains flexible at 5% in 2013 and 2014 might absorb the impact of the slowdown in the oil sector.
In addition, the report mentioned that Kuwait has stepped up its economic reformation procedures and policies that allow free trade during the past years, in order to improve the business environment, and reinforce direct foreign investments in Kuwait. The small and medium projects fund that has been approved recently, will pump KD 1 billion to fund small companies, which will also improve the business environment in Kuwait.
Consumption expenditure in the private sector is also expected to witness further growth after the recent procedures announced by the government, while inflation remains at its normal levels.
Having rebounded strongly from the global economic crisis in 2009-2010, Kuwait recorded robust economic growth of 6.3% in 2011 as private consumption and investment were lifted by highly expansionary fiscal policies of the government. We estimate Kuwait’s real GDP growth to have grown steadily by 5.2% for 2012 on the back of sustained inflows from oil exports boosted by record-high production, increasing foreign direct investment (FDI) and accelerated government expenditure arising from the highest ever budget surplus registered for the first ten months of FY2012/13.
Looking ahead, real GDP growth is expected to remain resilient at 4.5% in 2013 and 5.0% in 2014 amidst sustained oil production and exports. Kuwait’s economic growth will continue to be driven by expansion in government expenditure and private consumption with possible upside surprises coming from the private investment as we expect FDI inflows to pick-up following improving business conditions based on assumptions of lower oil output.
Kuwait boosted its oil production in 2012 to an average of 2.8mln bpd, up from 2.5mln bpd in 2011. It is estimated that Kuwait can produce an additional 0.4mln bpd of oil before reaching its maximum capacity of 3.2mln bpd. Despite the Organisation of Petroleum Exporting Countries (OPEC)’s projections of a 0.3mln bpd drop in total OPEC oil production to 29.8mln bpd for 2013, we still expect Kuwait oil output to maintain at current level as the drop for the OPEC forecast is minimal. Moreover, major output adjustments under OPEC have traditionally been the role of Saudi Arabia, due to its enormous capacity estimated at 12.5mln bpd. In fact, Kuwait’s oil output had increased slightly in February 2013 to 2.81mln bpd from 2.8mln bpd in January 2013. Reserves Kuwait holds the fifth largest oil reserves in the world at 102mln boe (barrels of oil equivalent) or 6.8% share of world oil reserves and is capable of further boosting its oil production and exports by tapping on its massive reserves. In addition, signs of recovery in the US and China may likely bolster the global demand for oil and hence, underpin potential increase in oil production from oil exporters including Kuwait. In fact, OPEC, in its latest monthly oil report, projected global oil demand to increase slightly to 89.7mln bpd for 2013 from 88.8mln bpd in 2012 on the back of higher demand from China. We expect Kuwait’s output to continue holding up at current volumes of around 2.8mln bpd for 2013.
We expect Kuwait Export crude oil price to sustain at current elevated levels, averaging at USD110pb for 2013, which is similar to last year. Not to be mistaken with our in-house oil price forecast, which is the average of the WTI Cushing and the European Brent, the Kuwait Export Crude is of a higher quality and is suitable for refining into downstream oil products. The OPEC recently raised its 2013 forecast for global oil demand by 800,000bpd to 89.7mln bpd, up from 88.8mln bpd in 2012. Furthermore, renewed political uncertainties in the MENA region may also pose a risk to Middle-Eastern oil supply lines and push oil prices even higher. Year to date, Kuwait Exports oil price remained resilient as it averaged at USD108.8pb, representing only a mere 0.6% decline from 2012. In comparison, WTI and Brent crude oil prices have averaged at USD94.25pb and USD112.70pb, respectively, from January 2013 until 25 March 2013.
The Kuwaiti government has recently announced that USD5.4bln will be allocated for development spending under the Kuwait Development Plan 2013-14. The FY2013/14 allocation, which represents about 11.0% of GDP, will focus on infrastructure development in the power and water sectors as well as upgrading Kuwait’s land, maritime, air transport networks, energy, health and education services. Increase The USD125bln Kuwait Development Plan, which aims to diversify the economy away from oil and increase the role of the private sector, envisages significant investment in infrastructure, including the Silk City business hub, the Subiya causeway and the Kuwait City metro and railway. The plan also includes the Mubarak al-Kabeer port in Bubiyan Island, infrastructure for new industrial zones and a number of low-cost housing projects.
This will be a boost to the infrastructure sector given Kuwait’s mounting demand for infrastructure development in line with the rapid growth of the population amidst a rising immigration of foreigners and higher birth rates. Over the last 10 years, Kuwait’s total population grew at a compound annual growth rate (CAGR) of 4.4% per annum to 3.9 million in 2013 according to figures published by the International Monetary Fund (IMF). The IMF envisages Kuwait’s population to reach 4.3 million by 2017. Given that rapid population growth is expected to continue in Kuwait, demand for infrastructure is likely to continue fuelling robust activities in the infrastructure and construction industry as well as the real estate sector in the coming years. Furthermore, the Kuwaiti government recently introduced a new companies’ law to replace the old Commercial Companies Law of 1960 providing greater clarity in terms of the powers of boards of directors and more stringent corporate governance rules. As a result, FDI inflows to Kuwait, which rose by 25.1% y-o-y to USD398.6mln in 2011 from USD318.7mln in 2010 is expected to increase further in 2013 and the years ahead following this new regulatory development.
With the positive steps above, the perception of Kuwait as the least business-friendly country in the Gulf Cooperation Council (GCC) is likely to change. The World Bank’s Doing Business Survey 2013 ranks Kuwait at 82nd, 5 ranks lower than in 2012 but noted that Kuwait has reduced the number of procedures needed to approve construction permits, registering a property and obtaining access to electricity. Furthermore, Kuwait ranks relatively high on the global scale in terms of efficiency on its tax system as well as its investor protection framework. In addition, the recently approved KWD1.0bln SME Fund with the objective of providing financing for small businesses will also increase the ease of obtaining financing and improve the overall business environment in Kuwait. The impact may be substantial as small and medium enterprises form 85% of total private businesses in Kuwait. As such, we believe Kuwait’s ranking performance in the World Bank’s Doing Business Survey will improve in the coming years which will bolster foreign direct investment into the state.
The latest MasterCard index of consumer confidence for 1H13 indicates that overall consumer sentiment in Kuwait is at its highest since 2010, with an “extremely optimistic” score of 95.8 compared to 84.7 in 2H12. Optimistic Consumers in Kuwait are optimistic in their overall consumer confidence score, and are more positive about all five indicators measured in the index for 1H13 when compared to the previous edition of the index released in 2H12. According to the index, it is found that Kuwaiti consumers are currently most optimistic about Regular Income than before (1H13: 98.8 vs. 2H12: 96.2), followed by Quality of Life (1H13: 96.6 vs. 91.3), Economy (1H13: 95.7 vs. 88.3), Employment (1H13: 93.9 vs. 2H12: 88.8) and Stock Market (1H13: 93.8 vs. 2H12: 59.0). Given the improvement in the index compared to 6 months ago, Kuwaiti consumers appear to be very optimistic about their income and the economy and will stand to support a further rise in consumer spending. In 2012, inflation slowed to 2.9% down from 4.8% in 2011 as major components of the CPI such as housing and food prices registered slower increases. Overall, inflation in 2012 was more subdued than initially anticipated at the start of the year, largely due to the sharp deceleration in food price inflation.
Looking ahead, Kuwait’s inflation rate is expected to remain at a manageable level of 3.0% - 4.0% for 2013-2014 as food prices are expected to remain modest while prices in the housing segment is likely to remain relatively stable. Food prices, one of the main sources of upward pressure for headline inflation rate for the last couple of years, had seen a marked deceleration in line with moderating global food prices. The government’s price control measures on fuel and food items through an extensive subsidy system will also likely prevent a drastic rise in inflation. The housing sector has seen nearly stagnant rents following the global economic crisis of 2009 in which it had recovered from. Recent inflation data showed a slight pick-up in rental rates, which could place upward pressure on headline inflation in the future. Kuwait interest rates generally track those set by the US Federal Reserve (the US central bank) as the Kuwaiti dinar (KWD) is pegged to the US dollar (USD), which makes up the bulk of the undisclosed, trade-weighted basket of currencies. However, the Central Bank of Kuwait cut its discount rate from 2.5% to 2.0% in early October 2012, its first rate cut since February 2010. The central bank said the move, which came as inflation fell substantially, was aimed at boosting growth in the non-oil economy. In general, Kuwaiti rates are forecast to stay largely unchanged until the US Federal Reserve starts to tighten policy in mid-2015. However, any unexpected rate cut by the Central Bank of Kuwait is likely to boost loan demand and stimulate bank lending to the housing sector. With just two months remaining for FY2012/13 and only less than 50% of the budgeted expenditure spent, we expect government expenditure to accelerate further towards the end of the fiscal year. We expect government expenditure to register an average monthly figure of KWD3.3bln for the remaining two months (February 2013-March 2013) of FY2012/13, amounting to KWD 16.5bln for the whole of FY2012/13. However, we highlight that our FY2012/13 forecast for government expenditure will still be lower than the previous fiscal year’s spending by 3.0% and the budget target by 22.2%.
We reiterate our forecast for Kuwait to register yet another record year of budget surplus of KWD15.9bln for FY2012/13, which is higher by 20.0% y-o-y compared to FY2011/12, supported by higher revenues and lower expenditure. As such, Kuwait is on track to register the 15th consecutive year of budget surplus. Revenue is expected to increase by 7.2% y-o-y to KWD32.4bln in FY2012/14 amidst increased oil production while expenditures are estimated to be slightly lower by 3.0% y-o-y at KWD16.5bln for FY2012/13 due to delays in spending and implementation of capital projects. Conclusion * We reiterate our real GDP growth forecast at 4.5% for 2013 and 5.0% for 2014, with anticipation of moderate growth of oil production and exports. However, the slower growth in the oil sector can be cushioned by the non-oil sector; which we project to remain resilient at 5%-6% for 2013-2014.
Furthermore, Kuwait had stepped up its economic reforms and liberalisation policies in recent years with the aim of improving the business environment and bolstering foreign direct investment (FDI) in the country. The recently approved SME Fund, worth KWD1bln, with the objective of providing financing for small businesses will also improve the overall business environment in Kuwait.
In addition, growth of private consumption expenditure is also expected to power ahead following recent measures announced by the government. The latest ‘Family Fund’ plan proposed by the Kuwaiti government requires the state to waive the interest on the loans taken by Kuwaiti citizens for loans taken prior to 30 March 2008. Also, citizens who are not covered by the plan will be granted KWD1,000 each.
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