These include projects in the transport, power and oil refining sectors. This should ease the economy’s dependence on growth in the consumer sector, which will nevertheless remain firm thanks to high employment levels and fresh government measures to support income growth. These trends will add to Kuwait’s traditional strengths of large fiscal and trade surpluses, which will provide a buffer against any fresh turbulence in the global economy.
But challenges remain Large projects carry significant implementation risks – particularly those with more complex structures such as the public-private partnerships (PPPs).
Moreover, the economy faces broader longterm challenges, most notably the need to create viable private sector jobs for new entrants to the workforce. The latter requires deep-rooted structural reforms in areas such as competition and privatization, the labor market, and education. Despite the surpluses, fiscal reform is also needed to put the budget on a stable long-term footing.
Real GDP After another year of double-digit growth in 2012, oil production is set to be flat in 2013. Production levels have reached close to their maximum of 3.3 million barrels per day and softer global oil market fundamentals are assumed to prompt OPEC to stabilize its output near current levels. This will push the headline rate of real GDP growth down to 3.2% from 6.1% in 2012. GDP growth is assumed to slow further in 2014 on cuts in oil output, but the broader business climate remains positive. Despite robust conditions in the consumer sector, inflation continued to decelerate through 2012, falling to just 2.1% in October.
This was driven by the food and housing components, but other ‘core’ components remain soft, too. Some of this may reflect the lagged impact of earlier dinar strength against the euro and other currencies in lowering import prices.This is assumed to gradually unwind and as demand conditions steadily strengthen, we expect some limited upward price pressures in 2013. But inflation is still seen averaging a moderate 3-4% over the next two years.
The budget is forecast to remain in huge surplus, though decline to under 20% of GDP over the next two years as oil revenues plateau but spending pushes higher. After falling in FY11/12, on-budget capital spending is assumed to rise steadily over the next two years on faster project implementation, but should remain close to 10% of total government spending.
Current spending could rise by 18% in FY12/13 on increases in public sector pay and social spending, but growth slows thereafter. Meanwhile, strong oil receipts are expected to keep the current account surplus extremely strong over the forecast period at 35-45% of GDP, implying a continued build-up in Kuwait’s foreign assets.NBK economic report
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