Oil revenues ensure solid fundamentals

Moderate rebound in non-oil activity

Economic activity has been sluggish since 2017. The main reasons are the oil sector’s weighting as a share of GDP (about 60% of total GDP) and the constraints squeezing domestic consumption. A few signs of a rebound in non-oil GDP can be seen in 2019.

As an OPEC member[1], Kuwait is bound to follow the cartel’s production policy. In 2018, crude oil production averaged 2.74 million barrels/day (mb/d), compared to 31.8 mb/d for the OPEC countries as a whole. In 2019, oil production should decline slightly to an average of 2.71 mb/d. After increasing 1.3% in 2018, oil GDP should fall by almost 1% this year. At last December’s meeting, the OPEC+ group, which is comprised of the cartel members plus other oil producing countries, mainly Russia, decided to reduce oil production to boost prices and limit the risk of an oil supply glut at the global level. Oil production is expected to increase in the medium term, even though the national oil company KOC’s plan to develop production capacity seems difficult to meet. The plan calls for production capacity to be increased to 3.65 mb/d in 2023, from the current level of 3.15 mb/d. Refining capacity might also be increased by more than 30% by 2025.

The main growth engines of non-oil activity are public expenditure (which largely determines household consumption), infrastructure projects and the real estate sector (about 11% of non-oil GDP). After two years of relatively tighter fiscal policies in 2016 and 2017, non-oil activity rebounded mildly in 2018 (+2.5% in real terms). In 2019, a moderate increase in current fiscal spending (+2.5% in value) should continue to boost private consumption (30% of GDP). Major transport and energy sector projects are slated to begin in 2019. Moreover, after a depressed period, the real-estate business seems to have picked up again since mid-2018, even though this trend has yet to be confirmed. All in all, real non-oil GDP growth is estimated at 3% this year, up from 2.5% in 2018.

Assuming that oil prices decline slightly, total GDP growth could reach an estimated 0.7% in 2019 before accelerating to more than 2.5% in 2020 and 2021, thanks to an upturn in oil production, a mild rebound in investment and the support of public and private consumption.

Subdued inflation

Consumer price inflation has been subdued since 2017, due notably to depressed real-estate prices. The sector’s weighting on the consumer price index exceeds 30%. In 2018, prices rose 0.5% on average, while the index’s real estate component has contracted by an average of 1.1%. In the recent period, the main source of price increases can be directly linked to fiscal policy. The cut in energy subsidies in 2017 triggered a significant increase in transport costs. The quasi-peg of the Kuwait dinar to the US dollar severely restricted monetary policy and the range of tools available to fight inflation.

In 2019 and 2020, inflation could rise slightly (estimated at 1.5% and 2%, respectively), stimulated by a mild recovery in the real estate sector. In 2021, prices could accelerate towards 2.5% with the possible introduction of VAT. A substantial increase in oil prices could also trigger an acceleration in inflation in the medium term, by stimulating private consumption via the intermediary of public spending. For the moment, we have not integrated this scenario into our forecasts.

A very comfortable fiscal situation despite the lack of reforms

Public finances are highly dependent on oil revenues, and this situation is unlikely to change in the medium to long term. Oil revenues account for about 75% of total fiscal revenues, while investment-related revenue (sovereign funds) accounts for about 20%. Non-oil tax revenues are very low. Kuwait was the Gulf country hit the least hard by the decline in oil prices in 2015-2016. Given the size of oil revenues with regard to spending, the fiscal breakeven oil price (Brent reference) is among the lowest in the region (roughly USD 55/b). After the country swung into a fiscal deficit in 2015/2016[2] (-1.3% of GDP), fiscal consolidation efforts have been fairly limited, primarily for political reasons. For the year 2019/2020, the fiscal surplus is expected to swell to 6.1% of GDP, and to average 4.8% of GDP in 2020 and 2021.