Kuwait’s economy is estimated to register a real growth rate of 6.5%-7.0% in 2006, which followed 8.1% growth rate in 2005. Kuwait’s nominal GDP grew by 35.1% to reach KD23.6bn in 2005 and estimated to register a growth rate of 15% in 2006. The per capita GDP has improved from KD6,343 (US$21,722) in 2004 to KD7,886 (US$27,006) in 2005, an increase of 24.3%. The strong growth achieved in previous years continued in 2006 also.
The performance of the Kuwait economy in recent years has been primarily due to high oil prices and increased oil production levels. The average export price of Kuwait crude oil increased from US$48.7/b in 2005 to US$58.9/b in 2006, a rise of 21%. However the production level of crude oil in 2006 remained same as the previous year. The CAGR of nominal GDP during the four year period 2001-05 was 21.9%. Other GCC countries have also experienced high economic growth rate in recent years primarily due to the oil factor.
Oil and gas sector continues to dominate the GDP. Its share in GDP has increased from 43.4% in 2004 to 52.9% in 2005. The sector has registered a CAGR of 29.3% during the four-year period 2001-05. The output of this sector increased from KD7.82bn in 2004 to KD12.83bn in 2005, registering a growth of 64%. Strong growth in both oil prices and production levels were main reasons behind spectacular performance of the sector, which was in-line with most of the countries in the region. Among the GCC countries, Qatar is most reliant on oil sector, after which Kuwait comes second. Oil prices increased in 2004 and 2005 due to strong demand driven by global economic growth led by emerging economies like China and tight production capacity in OPEC and non-OPEC countries. Lack of adequate spare capacity in the entire oil supply chain, starting from drilling and exploration to transportation and refining, combined with strong growth in demand for oil was instrumental in leading to a dramatic surge in crude oil prices both in the spot and futures markets.
Due to increasing importance of oil in Kuwait economy, share of non-oil sectors in GDP has come down in recent years in spite of good growth. This is evident from the fact that the share of ‘Financial Institutions’ in GDP came down from 8.2% in 2004 to 7.4% in 2005 despite growing by 20.4% in 2005. Similarly the share of ‘Transport, Storage and Communications’ in GDP came down from 5.8% in 2004 to 5.3% in 2005 despite growing by 23.8% in 2005. Other major contributors to GDP are ‘Community, Social and Personal Services’ and ‘Real Estate’. The share of ‘Community, Social and Personal Services’ sector in GDP has come down from 16.2% in 2004 to 12.7% in 2005. Similarly the share of ‘Real Estate’ sector in GDP has come down from 6.1% in 2004 to 4.7% in 2005. We believe that although non-oil sectors will achieve good growth in coming years, the economy will continue to be primarily reliant on oil and gas sector.
In 2005, private consumption spending and government consumption spending formed 31.4% and 15.4% respectively of the GDP. This indicates that Kuwait economy is primarily consumption led. However the growth in consumption spending has been modest over the years as evident from the fact that it has a grown at CAGR of 10.2% between 2001 to 2005. Gross fixed capital formation (GFCF), which was not very significant till a few years back, has registered good growth in recent years. It has grown at a CAGR of 32.1% during the period 2001-05, much higher than consumption spending. The share of GFCF in GDP has gone up from 14.3% in 2001 to 19.7% in 2005. We believe that the share of GFCF in GDP will go up in the coming years in view of government’s focus on capital expenditure. The government has stressed on maintaining a significant rate of investment in public spending because of its important role in activating the economy.
The robust economic conditions and increased private spending as well as a strong pick up in gross fixed capital formation driven by several capital projects will help the economy to sustain its growth rate. Ongoing high levels of government earnings will provide a strong stimulus to expansion in an economy reliant on public-sector contracts. The government remains publicly committed to extending the role of foreign direct investment, having introduced legislation to facilitate it in recent years. Government outlays will continue to provide an economic stimulus and is likely to push up import volumes as demand for consumer, intermediate and capital goods will remain high. Strong government spending will ensure that domestic demand remains buoyant in coming years.
A decline in oil prices in coming years may slow down the economic expansion. This may be a possibility in the event of slowing down of world demand, easing of geopolitical tensions and slowdown in economic growth of major economies. In recent months, we have seen a decline in oil prices. The OPEC basket prices have come down from US$72.7/b in August’2006 to less than US$50/b in initial days of 2007. This was due to uncertainties about global economic prospects particularly in US, slowing demand growth, mild US winter, rebounding non-OPEC supply and high stock levels. However, the implementation of the recent decision to cut production by OPEC members may help to stabilize oil prices. Though at the present price level, Kuwait economy will continue its good growth in the medium term, there are concerns over longer term sustainability of economic growth in the event of a significant decline in oil prices.
