Kuwait: 3.0% growth this year, all eyes on government projects

• Kuwait: 3.0% growth this year, all eyes on government projects

  The Kuwait economy is recovering this year and real GDP should grow 3.0%. The non-oil sector is expected to lead with growth of 4.0% while the oil sector advances 1.4%. 
• The consumer sector is growing, and real estate is improving. The remaining sectors, though healthier, await government spending to improve further.
• As they gradually come on line, government projects should lead to faster growth in 2011 and beyond.
• Inflation was 4.0% last year and should be steady at 4.2% this year

NBK’s latest GCC Brief stated: Kuwait’s economy is improving and set to grow 3.0% in real terms this year. Most sectors are steady and/or improving:

-       the consumer sector which had been the steadier through last year’s weakness is still holding up well.

-       the real estate sector is showing improvement in recent months and is returning to levels of activity not seen since 2007-08, except in commercial real estate, where oversupply is weighing on the sector.

-       the so-called “productive” sectors (trade, industry, construction, etc) are finally and tentatively showing signs of life, after a protracted period of stagnation. It is no surprise that these sectors were the most impacted by the crisis/weakness of 2008-09.

-       the oil sector is recovering along with world demand, and is expected to grow 1.4% this year in real terms.

-       the non-oil sector should grow 4.0% this year, to yield the 3.0% overall performance we project.

Data for the first few months of this year support this view of gradual improvement, and we expect the 2010 pace of growth to accelerate toward a 4-5% clip by 2011-12, depending on the government’s ability to deliver on large plans and projects in coming months.

The world economy which had looked stable for some time is now again raising concerns around Greece, and other over indebted states and their macroeconomic impact on Europe and beyond. Now, the GCC economies have little direct exposure to Greek debt or Greek banks, and similarly for other distressed borrowers (Portugal, Spain, etc). However, we have seen in recent weeks that these remote events have pressured oil/energy prices and stock markets worldwide. Oil prices are still around USD 70 pb and the Kuwait stock market is still up slightly on a year-to-date basis, even after the severe correction of the last two weeks.

The Consumer

Consumer confidence (ARA index) is back near its best levels of 2009 following a dip in the third quarter. The improvement of the past few months coincided with the passage of the 5-year plan and other legislation. There has also been, until very recently at least, better world economic news and the announcement of Zain going through with the sale of its African assets.

Better sentiment is reflected in plans to purchase durables (chart 1) and continued spending and borrowing by consumers (chart 2). Consumer debt did slow in April for special reasons, but the trend should remain steady, supported by a moderate growth outlook and expectations of improvement next year.

Investors

Similar improved sentiment is witnessed on the investor side. The stock market (KSE) did have a good run prior to the last (Greece/Europe related) correction. Investors did put some money to work in the market as well as in real estate investment/apartments property, in search of yield (chart 3). Sales have returned to pre-crisis volumes for residential and investment property. The commercial side of real estate still lags, in particular the office building segment where oversupply remains a problem.

Business

More generally business sentiment has also been on a steady improvement in the last few quarters (Dunn and Bradstreet (chart 4)), again perhaps in part thanks to the improved world economy and to anticipation related to the 5-year plan. The business sector is of course more sensitive to the economic cycle than the consumer, and the business slowdown was marked during the recession of 2009.

Business or corporate loans, which did slow significantly last year (chart 1), have stabilized in recent months. They may be about to recover the rest of this year. April data did show better business lending activity. For example, lending to trade/industry/construction (together) was up KD 60 million in April, matching its best performance of the past 7 months.

Inflation

Inflation has dwindled over the course of 2009 from a high of 11.6% y/y (Aug 2008) to 2.1% in December 2009 (chart 5). The most recent data, January 2010, show a rate of 2.8% y/y. With the economy and commodity prices rising, we expect that inflation will average 4.2% this year, almost the same as last year. This would be near the average of the past few years and, by itself, should not prompt any policy changes.

Budget and government finances

The preliminary budget numbers for FY 2009/10 show a surplus of KD 8.2 billion. We expect that number will be revised, close to KD 6.0 billion, when the final accounts are released. It would be the 12^th consecutive surplus and would leave the state’s finances in superb shape, giving it flexibility and latitude to stand behind the projects of the 5-year plan. (One half of the KD 31 billion worth of projects for the next 4 years is expected to be financed by the public sector.)

Government and conclusion

The NBK report concluded: Official action continues apace. After passage the 5-year plan and the Capital Markets Authority law, we now have the new privatization law. For growth the next few years though, the speed of execution on the government’s projects remains crucial. Of the major projects, the Sabiya power plant, Jaber el Ahmad Hospital, and the Jahra motor way were awarded in 4Q2009, worth a total of KD 948 million (USD 3.3 billion). More similar projects are in the process of being tendered and awarded this year. This type of spending will affect the economy once financed, and the project actually started. The money will of course be spent and enter the economy over time. These large projects are multi-year projects. Nonetheless as more of the projects, large and small, in the 5-year plan are tendered, awarded, financed, etc. the more they will add to growth and the sooner we will get to the 5% or better GDP growth rate expected beyond 2010. □

Source: CBK, NBK / ThomsonReuters Ecowin; forecasts are NBK

¹Brent crude