The latest data show that Kuwait’s GDP growth in 2012 was driven by a rapid rise in the oil sector, although the non-oil economy showed improvement. An uptick in consumer sentiment is set to support continued expansion in 2013, but Standard & Poor’s (S&P) says that long-term growth may be hampered by the government’s inability to meet its investment goals.
Oil output rises in 2012
According to a report issued by the National Bank of Kuwait (NBK) is early September, nominal GDP growth hit 16% last year, mainly the result of a 19% rise in the contribution from the energy sector. While oil prices and output were both up, it was the latter that was the more important factor, rising by 12% to 3m barrels per day. Accordingly, oil’s share of GDP hit 66%, the highest level since 1980.
The non-oil economy saw nominal growth of 10%, an improvement over the 8% recorded in 2011. Two sectors drove the result – manufacturing, which increased by 28%, and “other services”, which recorded a rise of 14%. The expansion in manufacturing was largely driven by the petrochemicals sector.
Consumer confidence up in 2013
The outlook for the non-oil sector in 2013 is good, thanks in part to a rise in consumer spending, according to another recent report from NBK. Point of sale transactions climbed nearly 18% year-on-year (y-o-y) for the first six months of 2013 to reach $11.4bn. The bank attributed the increase to wage rises that came into effect at the end of last year; an increase in employment levels, with most jobs coming through the public sector; and strong consumer sentiment.
“Consumers were also more optimistic about the performance of the general economy than they were a year ago,” the report said.
This positive outlook is expected to spread into other areas of the non-oil economy, with the real estate, construction and banking sectors all predicted to expand this year and in 2014. Supported by a more active non-oil sector, analysts have predicted GDP growth ranging from 1.1% – a figure issued by the IMF in April – to as high as 4.5%, with most tending to favour a middle ground of around 3%.
While Kuwaitis may be spending more, it seems as if this increase in outlays is not feeding into inflation, suggesting that supply is able to meet consumer demand. Y-o-y retail inflation came in at 2.9% for July, down from 3% the month before. The July result is well down on the 2012 year-end figure of 4.3%, and is currently below the 4.1% mark predicted for 2013 by the Kuwait Central Bank at the end of last year.
Mixed messages on longer-term outlook
The Kuwaiti economy was given a mixed review in mid-September, when ratings agency Standard & Poor’s (S&P) reconfirmed its “AA/A-1+” long- and short-term foreign and local currency sovereign credit assessment for the state, with the outlook being assessed as stable. The affirmation was based in part on strong external and fiscal balance sheet positions, helped by what S&P described as prudent wealth management.
While generally positive, the S&P report said Kuwait’s creditworthiness was susceptible to any future sharp and sustained decline in oil prices, and noted uncertainties related to the political system, the undiversified economy and lack of transparency regarding government assets.
Kuwait has worked to diversify and broaden the base of its economy, but a number of major investment projects have stalled or are running well behind schedule. This was reflected in recent figures that showed capital spending in the 2012-13 financial year ending March 31 amounted t $3.35bn, equivalent to 69% of planned outlays. Moreover, current spending, on items such as wages, has been rising more rapidly, at 16% per year since 2008, compared to 7% per year for public investment in capital projects.
While these increased outlays on wages are flowing into the economy through the conduit of higher consumer spending, it does not necessarily lay the foundations for longer-term growth. The government has said it intends to fast-track capital spending and to meet budgetary targets, a commitment the NBK said could be met, as there were “recent signs that large government-led projects are at last beginning to get under way”.
Should these signs be pointing in the right direction, Kuwait’s economy could register growth above the rate of 1.1% forecast by the IMF, and help build a platform for more sustained expansion in 2014 and beyond.