What a difference a couple of years make. After posting its sharpest contraction since the Iraqi invasion of 1990 in 2020, Kuwait’s economy is set for its best performance in a decade in 2022.
The steady recovery of the price of oil — exports of which account for around 90% of Kuwaiti government revenue — since the lows of early 2020 has prompted the government to forecast a significant decrease in the country’s deficit for the coming fiscal year, even ahead of fresh increases prompted by the Russian invasion of Ukraine, with recent concerns over a lack of liquidity also put to rest.
The respite from higher oil prices accompanies a winding down of Covid-19 restrictions in the country as infections wane, and an improvement in general business sentiment, with listed companies on the Kuwait stock exchange reporting a 398% year-on-year increase in profits for the first nine months of 2021.
“High vaccination rates, a strong oil price recovery, increased government spending on infrastructure projects, coupled with reforms, are expected to contribute positively to economic growth,” says Ali H Khalil, CEO of investment bank Kuwait Financial Centre.
Market fluctuation
Yet the relief brought about by the recent increase in oil prices may well remain short-lived, with predictions of a correction in prices by the end of the year. What’s more, recent increases may prove counterproductive in the longer run, lessening the impetus for painful yet necessary structural changes to the country’s economy.
As the least diversified economy in the six-strong Gulf Co-operation Council (GCC) bloc, Kuwait is most susceptible to fluctuations in international oil prices, as displayed by the past two years. Already in a fragile state ahead of coronavirus outbreaks, the country’s economy was the worst hit of the GCC in 2020, as oil prices tumbled to around $30 a barrel in the early phases of the Covid pandemic.
In addition to running a record deficit — in effect since the fiscal year 2014/15 — the collapse in oil revenues prompted fears of a liquidity crunch, with ongoing political paralysis preventing the country from tapping international markets.
Yet with the crisis in the Ukraine propelling the price of oil beyond the $120/barrel mark, building on steady price gains following global vaccine rollouts, Kuwait’s gross domestic product is expected to rebound. The country’s economy is set to grow by 9.5% this year, according to Capital Economics, driven by stronger output from the oil sector as OPEC+ continues to fully unwind its production quota by the end of the year.
“Oil prices are likely to remain elevated over the coming months amid the war in Ukraine, though we do still expect that they will fall back towards the end of the year,” says James Swanston, a Middle East and north Africa economist at Capital Economics.
Planning for the future
In its 2022/23 budget, published in late January, the government is forecasting oil revenues for the coming fiscal year (beginning on April 1) to increase by 83.4% to Kd16.7bn ($55bn), based on an average oil price of $65 per barrel — around half the price it traded at in early March on Ukraine fears.
Following a law passed in 2020, the government will not transfer 10% of government revenue to the Future Generations Fund (FGF) as per usual, given that the current account remains in deficit.
“This will help significantly to ease concerns about liquidity of the government’s public finances,” says Mr Swanston.
Crucially, the government predicts that additional oil revenues will reduce the country’s deficit, which stands at around Kd12.1bn, by 74% in the coming year.
With oil prices running far higher than the $65/barrel amount specified in the budget, government finances may even be in a position to return to a surplus by the end of the fiscal year, according to Mr Khalil.
Pressure valve
The return to surplus also eases pressure on the country’s General Reserve Fund (GRF), the government’s favoured spending tool when revenues fall short, which has rapidly depleted over the past two years.
The government has been taking several measures to mitigate the same, such as raising funds by way of asset swaps with the FGF. The Kuwait Investment Authority, which manages both the FGF and the GRF, struck an agreement with state oil company Kuwait Petroleum Corporation in April 2021, which will see the latter pay Kd8.25bn in accrued dividends over 15 years into the GRF.
The windfall from higher oil prices coincides with an easing of Covid restrictions in mid-February, including, crucially, the lifting of a ban on foreign travel. Unvaccinated nationals and residents have also been permitted to enter shopping malls and other public spaces if they present a negative PCR test.
Even as revenues are set to increase for the year ahead, the government remains cautious on spending, given the recent deficit increases during the pandemic. It is budgeting expenditure of Kd21.9bn for 2022/23 (including around Kd3bn in capital expenditure), down by 4.8% from last year.
“We were keen to maintain our cap on expenditure at Kd22bn while maintaining healthy capital expenditure that is in line with previous years,” said finance minister Abdulwahab Al-Rasheed — appointed in a cabinet reshuffle in December — in a statement at the time of the budget announcement in late January.
Infrastructure spending
Transport projects together with much needed upgrades to the country’s hydrocarbon sector are set to be two key drivers of infrastructure spending in 2022, according to a Fitch Solutions report published in January.
While higher oil prices since the start of the year have provided a boon for public finances, observers believe such benefits are unlikely to extend beyond the end of the year.
“In our view, elevated oil prices cannot be sustained for long because of economies’ limited ability to absorb higher oil costs without an economic slowdown,” according to a Moody’s Investors Service note from early March, which forecasts prices to decline to around $68 per barrel in 2023 before easing further in the future.
Such declines would likely see a resumption of familiar economic pressures.
“In subsequent years, continued expenditure pressures and declining oil prices would result in a widening deficit and significant decline in government net assets over the medium-term absent strong consolidation efforts,” the International Monetary Fund said in its concluding statement of its 2021 Article IV Mission in October. “Fiscal deterioration would also cause the current account surplus to weaken significantly over the medium term.”
Overcoming challenges
Kuwait’s structural economic challenges are longstanding and well-known. In addition to a strong reliance on oil revenues, government spending is dominated by spending on subsidies and salaries for an increasingly bloated public sector.
In its 2021/22 budget, the government allocated Kd12.6bn — 55% of total expenditure — for salaries and wages, nearly triple the amount allocated in the 2013 budget, according to the World Bank. Despite constant signs of overstaffing, almost a third of the Kuwaiti civil service has been recruited over the past five years, according to the bank.
Of particular importance in the short term has been the country’s inability to renew the national debt law, which expired in 2017, leaving the country unable to raise money from local and international markets.
Yet prospects for the renewal of the debt law, let alone more far-reaching reforms to Kuwait’s deeply entrenched economic structural issues, remain slim, given the fractious relationship between the government and the country’s 50-strong national assembly that has stood in the way of basic reforms for decades.
Even by recent standards, 2021 proved a difficult year in political terms, with three new cabinets formed during the year amid repeated standoffs with the national assembly.
The most recent cabinet was formed in late December, with four members drawn from the National Assembly (including three opposition members) – the most since the mid-1990s. The appointments followed a period of national dialogue with opposition members, which included an amnesty agreement that saw some opposition figures able to return from exile abroad.
Such changes, however, are unlikely to break the political deadlock.
“The outlook for reforms remains weak, despite some positive political developments as part of a national dialogue,” said Fitch Ratings in a January note, in which it downgraded the country’s debt to AA– from AA, while retaining a stable rating. “Higher oil prices have relieved some immediate pressure, which could slow decision-making.”
