Economic Update

Published 15 Apr 2020

Kuwait’s experience of Middle East Respiratory Syndrome, a strain of coronavirus that first emerged in 2012, has stood it in good stead to respond effectively to the current Covid-19 pandemic.

Several of the Gulf state’s hospitals already featured triage units specialised in respiratory illnesses, with ventilation systems designed to prevent health care workers from becoming infected.

Building on this head start, Kuwait implemented strict precautionary measures after its first cases of Covid-19 were recorded in late February.

All non-cargo flights in and out of Kuwait were suspended as of March 13, making it the first Gulf state to ground all passenger flights. On this date mosques and public spaces such as parks and beaches were also closed, while on March 22 a nationwide curfew was imposed.

Schools and universities were likewise suspended, with the date set for their re-opening pushed back until August 4 at the earliest. All state institutions will be closed until at least April 25.

Meanwhile, the five-star Al Kout Beach Hotel and Al Khiran resort have been repurposed as quarantine centres, and the International Fairgrounds in Mishref are being used as a field hospital and testing centre.

These coordinated responses are intended to slow the spread of the pandemic: Kuwait recorded its first Covid-19 fatality on April 4, while as of April 14 it had registered a total of 1355 cases and three deaths.

Stimulus and SME support

In tandem with efforts to boost the resilience of the health care sector, the Central Bank of Kuwait (CBK) has been taking steps to mitigate the economic and social fallout from the pandemic.

On March 16 the CBK cut its benchmark interest rate by 100 basis points, to 1.5%.

The bank also asked lenders to postpone loan repayments from companies particularly affected by the crisis.

Then on April 2 the CBK announced it was launching a substantial stimulus package.

Geared towards supporting key sectors and small and medium-sized enterprises (SMEs), the package modified regulations and macroprudential policy tools, as well as making available $16.5bn for additional lending from local banks.

The CBK also cut capital adequacy requirements by 2.5%, and eased the risk weighting for SMEs, down to 25% from 75%.

“The recently-announced stimulus package will provide a very robust and effective defence against the short-term damage caused by the coronavirus,” Alok Chugh, Partner, Government and Public Sector Leader MENA at Ernst &Young, told OBG. “SMEs have been at the centre of the CBK’s vision, and the reduction of the credit-risk weighting from 75% to 25% has enabled banks to substantially increase their lending to SMEs and thus provide them with very effective support during this crisis.”

Short-term headwinds

The CBK has underlined that it is well placed to implement significant measures: following the global economic crisis of 2008, the bank put in place protective policies that have given rise to a strong capital basis and substantial reserves.

Nevertheless, in late March Moody’s placed Kuwait’s Aa2 rating on review for a downgrade, in light of a significant decline in government revenues.

Standard & Poor’s likewise downgraded Kuwait’s long-term sovereign credit to “AA-” from “AA”. The ratings agency cited both the global fall in oil prices and the relatively slow pace of fiscal reform in the country. It also noted that the pandemic had highlighted Kuwait’s lack of a sovereign debt law.

In a much-anticipated development, MSCI had been set to upgrade Kuwait from ‘frontier market’ to ‘emerging market’ status in May this year. However, while the Kuwaiti equity market continues to meet all the criteria, in light of Covid-19 this has been pushed back until November.

Another major development that has been postponed is the acquisition of Bahrain’s Ahli United Bank by Kuwait Finance House. The merger was given final approval in April, but will now take place in December this year.

Participation in regional and global efforts

More broadly, and despite the disruption caused to global commerce and travel, Covid-19 has provided Kuwait with an opportunity to strengthen international ties.

In mid-March Kuwait announced it was to provide financial assistance to regional neighbours Iraq, Palestine and Iran in their responses to the virus. Parallel to this, Kuwait donated $40m to the World Health Organisation to support its efforts to combat the pandemic.

Then, on April 7, Chinese ambassador Li Minggang met Abdullah Al Afasi, the undersecretary of the Kuwaiti Ministry of Commerce and Industry, to discuss cooperation between the two nations over Covid-19, and how Kuwait could obtain medical supplies from China.

Four days later, following a conversation between Indian Prime Minister Narendra Modi and his counterpart in Kuwait, Sheikh Sabah Al Khaled Al Hamad Al Sabah, a rapid response team of 15 doctors and health care professionals was sent from India to the Gulf state.

The team is expected to stay for two weeks, supporting testing and treatment and training personnel.