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Trying times for Kuwait’s economy

Historic enmity between Kuwait’s government and national assembly offer little confidence that the country will pass the economic reforms it desperately needs. 
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Trying times for Kuwait’s economy

A year on from the start of the global coronavirus pandemic, Kuwait’s recovery — in both health and economic terms — remains in the balance. After dropping in late 2020, its Covid-19 infection rates hit new highs in March, raising fears of higher mortality rates and a choking of recovery in the domestic economy.

Fears of a protracted period of lower hydrocarbon revenues appear to have subsided for the time being. After dropping to a 17-year low in March 2020 on the back of lockdowns around the world, and restrictions on local and international travel, the price of oil has risen to above pre-crisis levels, as accelerating vaccine rollouts feed hopes of strong global demand in 2021–2022.

Nevertheless, the crisis has exposed the frailties of the Kuwaiti economy, which was the second-worst performer in the Gulf Co-operation Council behind Oman in 2020. The International Monetary Fund (IMF) estimates that its gross domestic product (GDP) shrank by 8.1% in 2020, with a shallow recovery forecast for the year ahead.

The country remains heavily reliant on oil, which accounts for around 90% of government revenue, and has failed to significantly reduce its spending on energy subsidies, social benefits and a large and unproductive public sector.

“The outlook for Kuwait’s economy cannot be perceived in isolation from the inherited core issues it usually struggles with, such as the heavy reliance on oil, generous social benefits and an undiversified economy,” says Abdulwahab Al-Roshood, acting group chief executive at Kuwait Finance House, the country’s second largest bank by assets.

“These issues added stress on Kuwait’s financial position and economic activity, and limited its ability to move forward with its diversification plans and bold reforms.”

Although an uptick in oil revenues have reduced pressure on the country’s finances since November, the country’s new government — sworn in in early March — has reaffirmed its commitment to reducing spending and stimulating the private sector. Yet past experience suggests such reforms will struggle in the face of opposition from the country’s national assembly, which has viewed such attempts with hostility for many years.

Covid cases rising

Kuwait was quick to act to curtail the spread of coronavirus at the start of the pandemic. The country initially banned gatherings at restaurants and cafes on March 10, before issuing a wider set of restrictions, including the suspension of face-to-face teaching in schools and universities (which remains in place at time of writing) and a national lockdown between April and July.

While such measures helped contain the spread of coronavirus for much of the year, infections have been on the rise once again in early 2021, hitting new highs in early March. In response, the government cut opening hours for non-essential shops in early February and barred non-Kuwaiti citizens from entering the country. This was followed by a month-long curfew between 5pm and 5am, put in place in early March.

“Should the infection rate rise further ... this could prompt a full lockdown that would have negative implications for the economic recovery,” says George Richani, group chief executive of Ahli Bank of Kuwait.

“However, the [local] vaccination drive, which is picking up speed, will help mitigate this risk to a large extent.”

GCC chart

Economic growth recovery

After a tough start to 2020, the local economy began showing signs of recovery in the latter half of the year, says Salah Y Al-Fulaij, Kuwait chief executive for the National Bank of Kuwait (NBK), the country’s largest lender.

“Consumer spending continued its strong recovery in 2020, despite the negative effects of lockdown measures on economic activities, thanks to increased local spending due to travel restrictions during the holiday season and the deferral of household loan repayments for six months,” Mr Al-Fulaij told The Banker.

A budgeted 20% increase in capital spending for Kuwait’s fiscal year 2021/2022, which begins in April, may prove a powerful catalyst for growth.

“The value of total projects awarded in 2020, a year heavily affected by the Covid-19 pandemic, reached Kd1.2bn ($3.96bn) — well below initial forecasts,” he says. “Therefore, we hope to see a boost in 2021 and to see that reflected on the private sector’s activities, which in turn will contribute to creating financing opportunities for banks.”

While the IMF forecasted a 0.6% increase in GDP for 2021 in October, the vaccine-led surge in oil prices since November has prompted an upward revision in economic growth predictions.

“GDP is expected to add 1.9%, with 1% growth in oil GDP and 3% in non-oil GDP, as the dual shock of the Covid-19 pandemic and the collapse of oil prices start to ease off, in addition to seeing early indicators of increased global oil demand and the Organisation of the Petroleum Exporting Countries’ review of the current output quotas,” says Mr Al-Roshood.

Deficit spending

Of greater short-term concern is the ballooning public deficit, as the government struggles to rein in public spending. The government’s budget for 2021/2022, announced in January, laid out spending of Kd23bn for the year — a 6.9% increase on the year before — with a deficit of Kd12.1bn, assuming an average oil price of $45 per barrel for the year. As a result, debt levels are set to reach their highest level since the first Gulf war of 1991.

“Kuwait’s public finances were relatively healthy until 2020, with a debt-to-GDP ratio of 19.3% that year,” said Société Générale in a note in March.

“But the international context created by the Covid-19 pandemic is putting pressure on the country, and [debt-to-GDP] ratios of 36.6% in 2021 and 49.3% in 2022 are now expected.”

Of particular concern is how the deficit is due to be funded. The country’s parliament passed a law in 2020 that waived a requirement to transfer 10% of government revenues into the country’s Future Generations Fund (FGF) during deficit years, easing pressure on the country’s finances.

Yet the country’s General Reserve Fund (GRF), the government’s favoured spending tool when revenues fall short, has been rapidly depleted, thanks to six consecutive years of budget deficits and the collapse of oil prices in 2020.

Compounding matters has been the refusal of the country’s national assembly to renew Kuwait’s debt law, which expired in 2017, leaving the country unable to raise money from local and international markets since a debut Eurobond issuance that year.

Rating agency Fitch cut its outlook for Kuwait to negative in February, following a similar move by Moody’s in September, citing liquidity problems due to “political and institutional gridlock” in the country.

“Without passage of a law permitting new debt issuance, the GRF could run out of liquidity in the coming months without further measures to replenish it,” Fitch said in its commentary.

“Depletion of GRF liquidity would sharply limit the government’s ability to make good on its spending obligations and could result in significant economic disruption.”

Kuwait’s budget for 2021/2022 requires oil prices to hit $90 a barrel for fiscal breakeven; the recent surge in prices — Brent crude futures reached $70 per barrel in early March — combined with rosier forecasts for economic growth may see the deficit narrow significantly for the year.

“The rise in oil prices, as well as the suspension of the automatic transfer of revenues to the FGF during years of deficits, will help to shrink the financing hole,” said James Swanston, a Middle East and north Africa economist for Capital Economics, in a note in February.

“As a result, we think the government is most likely to request a loan from the FGF to help meet its financing needs and, at the same time, make a greater effort to pass the debt law to avoid a repeat of these problems in the future.”

Reforms on the agenda

The passage of a new debt law is just one of a series of reforms required to reshape Kuwait’s economy, amid growing recognition that higher oil revenues are unlikely to prove sustainable in the long term.

“With income looking weaker, but expenditures growing, budget figures simply do not balance,” said Ali Al-Salim, a Kuwaiti investor and commentator, in a recent paper. “Shortfalls are set to become larger and more frequent, and with that, so is the certainty of disruption.”

Of particular concern is a spiralling public wage bill, as part of the state’s obligation to provide jobs and welfare for Kuwaiti nationals, who account for around a third of the country’s 4 million strong population.

Public wages rose to 14% of GDP during 2010–2018 compared with 11% during 2000–2009, according to the IMF, with 80% of nationals employed by the state. The popularity of high-wage government jobs has stymied initiatives to diversify the economy and encourage nationals to join the private sector.

While the number of nationals with government jobs grew by 4.5% annually between 2014–2019, the number of Kuwaitis employed in the private sector shrank by 0.3% annually over the same period, according to Mr Al-Salim.

Parliamentary problems

Kuwait’s new government has committed itself anew to a programme of reforms to future-proof the country’s economy.

“We must address the scarcity of financial resources and the depletion of liquidity in the treasury [the GRF] as soon as possible, and they must be accompanied by radical economic and financial reforms that contribute to reducing expenditures and increasing non-oil revenues,” said Khalifa Hamada, Kuwait’s new finance minister, in a statement reported by the news agency Kuna on March 10. 

“Issuing bonds and other solutions are not reform solutions, but rather temporary measures that must be taken to fulfil the immediate obligations represented by salaries and subsidies, which constitute more than 71% of the state’s total spending.”

Yet the prospects for such an ambitious package of reforms remains slim, in the face of ongoing opposition from the country’s 50-member strong national assembly that has stood in the way of basic reforms for decades.

December elections brought in 32 new members of parliament, including younger candidates calling for economic reform and action to curb corruption and rising debt levels. The elections were the first held under the reign of the country’s new emir (head of state), Sheikh Nawaf al-Ahmad al-Sabah, who took office in September following the death of his much-respected half-brother, Sheikh Sabah al-Ahmad al-Sabah, who had ruled for 14 years.

Yet relations between the new government — appointed by the emir — and the national assembly rapidly broke down, leading to the government’s resignation in January.

While a new government was appointed in early March, the historic enmity between the national assembly and government suggests that badly needed economic reforms may take a long time to hammer out.

“The national assembly has proved to be a very effective veto player that takes no ownership of policy decisions and has no real incentive to make things happen,” says Steffen Hertog, associate professor in comparative politics at the London School of Economics.

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John Everington is the Middle East and Africa editor. Prior to joining The Banker, John was the deputy business editor of The National in the UAE, and has also worked for Dealreporter, Arab News and The Telegraph. He has also covered the telecom sector in Africa and the Middle East, living and working in Qatar and the UK. John has a BA in Arabic and History and an MA in Middle Eastern Studies from the School of Oriental and African Studies (SOAS) in London.
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