Rising oil prices helped offset cuts in Kuwait’s energy production in 2017, with infrastructure projects and new taxes laying the foundations for healthy growth this year.
Both the IMF and the World Bank said they expected Kuwait’s economy to contract, by 1% and 2.5%, respectively, in 2017 due to a combination of lower oil output and efforts to curb public sector spending, before returning to positive territory in 2018.
Capital spending boosts non-oil growth
This comes despite solid gains in non-hydrocarbons. In November the IMF forecast that the sector would expand by 2.5% in 2017, while the National Bank of Kuwait was even more upbeat on the non-oil sector’s prospects, putting annual growth at 3% in December, driven largely by capital spending under the government’s Kuwait National Development Plan.
Projects that moved forward under the plan last year, and which are set for completion in 2018, include a north-south rail network; a power generation plant at Al Abdaliy; the Sheikh Jaber Al Ahmad Causeway; and the Al Zur Northern Electric Power Generation and Water Desalination Plant.
Oil and gas projects part of long-term strategy
Kuwait also began work on key upstream and downstream projects that form part of its longer-term plans to boost hydrocarbons capacity, in anticipation of rising global energy demand.
However, domestic output remained below capacity in 2017, with more of the same expected in 2018, following the decision by the Organisation of the Petroleum Exporting Countries to extend cuts in production until the end of the year.
Stable outlook confirmed mid-year
Despite the slowdown, ratings agency Moody’s upgraded its outlook for Kuwait at the end of May from negative to stable, while confirming its “Aa2” long-term issuer rating in a move it said reflected the country’s strong balance sheet, high wealth levels and energy reserves.
In October Fitch affirmed a stable outlook and “AA” rating on the country’s sovereign wealth funds, noting its exceptionally strong fiscal and external metrics, and low budgetary breakeven point for oil pricing. The agency warned, however, that welfare spending and the dominant public sector could pose challenges in the future.
Acknowledging these challenges, the reserve bank continued to support private sector development through largely accommodative fiscal policy over the course of 2017.
In December the monetary policy committee of the Central Bank of Kuwait (CBK) decided to leave the benchmark discount rate at 2.75%, in line with its aim of boosting non-inflationary recovery in the non-oil sector and supporting the broader fiscal policy.
The CBK last moved on rates in March, lifting its discount rate by 25 basis points to its current level to help maintain the competitiveness and attractiveness of the national currency as a store of domestic savings.
Inflation edging up
The consumer price index climbed to 1.4% in October, with headline inflation, excluding rental, food and energy costs, rising to an annualised 3.3%, up from 2.5% the month before, due in part to stronger consumer demand. Forecasts from the IMF and other analysts suggest a cooling by the year’s end to between 1.6% and 1.8%.
The introduction of the GCC-wide, value-added tax (VAT), originally scheduled to come into force in Kuwait later in 2018, is expected to increase the inflation rate, however, with the IMF in November forecasting an average for the year of 2.5%.
The 5% tax, which is currently being assessed in Kuwait by a parliamentary committee, will affect all sectors of the economy, but most significantly: retail; financial services; technology, media and telecommunications; and real estate. It could also increase inflation.
However, its implementation, along with other levies and an expected rise in earnings from the energy sector, would also help Kuwait come close to achieving a fiscal balance in 2018, the IMF noted.
In early January 2018 media outlets reported that the introduction of VAT in Kuwait could be delayed until 2019.
Credit up, sentiment strong
While credit growth to the end of the third quarter was running at a steady 3.2% year-on-year, suggesting only moderate demand, bank card spending in the same period accelerated to an annualised 12.5% on the back of continued positive consumer confidence levels.
That same sentiment was evident in the property market, with sales in the three months to the end of October up 33%. Returns on real estate investments were more muted, however, with prices remaining flat, according to official figures released in November.
Stronger oil prices helped Kuwait’s balance of payments to rebound. As of the third quarter, the current account was KD1.13bn ($3.7bn) in surplus, up from KD428m ($1.4bn) in the same period in 2016, according to data issued by the CBK in December.
The surplus in the current account rose 62.1% in the third quarter to reach KD424m ($1.4bn), reflecting a sharper rise in exports over import growth for the term, the bank said.