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Kuwait economy to enter positive phase in 2018
January 27, 2018, 3:20 pm
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Following an estimated 1.1 percent contraction in 2017, Kuwait’s economy is likely to enter a positive growth phase in 2018, registering a growth rate of around 3.5 percent growth in the year ahead.

Relatively higher prices for petroleum products in recent months, increasing oil production and the government’s continued commitment to infrastructure investments, will support economic recovery and boost growth in 2018, says a new report by global market analysis firm BMI Research.

Though compliance with OPEC-mandated cuts effectively ties-down Kuwait to current production levels and potential loss in revenues — it is estimated that conforming to OPEC-cuts have slashed Kuwait’s hydrocarbon output by nearly six percent and is likely to bring overall real GDP down by about 2.5 percent in 2017 — BMI said it expected a turnaround this year. The report anticipated that strict compliance with the latest decision by OPEC, to extend production cuts until the end of the year, could begin to falter over the next 12 months. Many OPEC members including Kuwait would tentatively begin to increase their oil production by the second half of the year and this could help lift the country’s economic growth, said BMI.

However, the report cautioned: "In the event that oil prices do not rise in line with our expectations, owing for example to weaker global demand or greater-than-expected supply from US shale, we would expect Kuwait, and other OPEC members,  to rein-in production to closer to the OPEC quota level and this would weigh on headline growth."

Meanwhile, the International Monetary Fund in a report on Kuwait said that large financial buffers, low debt and sound financial sector allowed the country to withstand lower oil prices for longer than most other oil-producing states. The report, which came in the wake of the IMF Executive Board’s Article IV consultation with Kuwait in mid-January, also noted that non-oil growth has picked up modestly over the past two years and inflation “is on track to reach a multi-year low”.

The Fund said that improved confidence in the economy could see non-hydrocarbon growth inch its way towards 2.5 percent in 2018 and gradually gather steam over the medium-term. Reiterating this view, the BMI Research report also noted that with government committed to robust infrastructure investment — over 50 publicly funded projects are underway or at a planning stage — non-oil sector was poised to grow further in 2018.

Nonetheless, the IMF warned that non-oil growth could face headwinds if there were any significant drop in oil prices, tighter global financial conditions or heighted regional security and geopolitical risks, as well as any delays or postponement of projects or reform implementations.

Urging authorities to continue with planned reforms, the IMF said that while the government’s recent efforts to “streamline current spending, diversify revenue streams and improve the business climate”, were laudatory, it needed to further curtail current expenditure, contain the public wage bill and introduce excises and value added tax (VAT) as previously planned. The Fund also noted that “better aligning public and private sector compensation would enhance nationals’ incentive to consider private sector jobs and support competitiveness”, while limiting public sector employment growth.

Meanwhile, analysts believe that the government could use the current windfall from higher oil prices to bring down burgeoning budget deficits — estimated to come in at 15.9 percent of GDP in 2018, down from the estimated 21.3 percent in 2017.

Kuwait is also exploring its options to sell dollar-denominated bonds and is reported to have been in talks with banks about the possibility of a new bond sale as early as the first-quarter of 2018. The issuance could be higher than the US$8 billion that was issued in March 2017, provided authorities receive the requisite approval from Parliament, where a draft bill to raise up to KD25 billion from international and domestic markets, is still pending.

But Kuwait’s Ministry of Finance denied that any decision had been made “regarding any potential issuance, timing or size of issuance”. The ministry added that any decision would be taken only once a debt law was in place and that it would “determine if and when any international debt is to be issued”. The ministry also noted that “debt is integral to the government’s balanced approach to finance short-term fiscal requirements through a prudent and responsible mix of GRF withdrawals and debt issuance”.

But Kuwait is not the only one aiming to tap into international debt market, Qatar, Saudi Arabia and Abu Dhabi are planning to enter the debt market in the first quarter to help plug budget deficits. Oman has already raised $6.5 billion from a bond offering this year as the Middle East’s biggest non-OPEC producer seeks to bridge its budget deficit.


 

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