EIU highlights robust 2002 for Kuwait

Kuwait will be less affected than most other oil economies by a likely temporary oil price slump in 2002, according to a new report from the Economist Intelligence Unit.

But the EIU forecasts a 0.5 per cent fall in GDP next year due to a decline in oil revenues, before a recovery to growth of 3.5 per cent in 2003. Oil production is expected to drop by 8.2 per cent to 1,870,000 bpd in 2002. And the current account surplus will dive from USD12.5bn this year to USD5.4bn.

However, oil minister Adel Khaled Al Subaih told the EIU that Kuwait would be less affected than other oil economies by an oil price collapse, and noted that the market would correct itself as happened in 1998.

The EIU also forecasts that the dollar will weaken against the euro in 2002, and thus the dollar-tracking Kuwaiti dinar will also fall in value. This is expected to hike inflation to 3.3 per cent in 2002 and 3.5 per cent in 2003.

Moreover, capital expenditure on major capital project is forecast to increase imports from USD7.4bn in 2001 to USD8.2bn in 2002 and USD9.2bn in 2003. The EIU reckons that economic reform such as privatisation and the promotion of foreign direct investment may also improve the economic outlook over the next two years.

It is interesting to note that impartial experts such as the EIU are all expecting the Oil States to ride out the global economic slump with some ease. And indeed after two excellent years for oil revenue there must be plenty left in the coffers to sustain economic expansion into 2002.

One factor that the EIU ignores in its rather superficial report is the beneficial impact of lower interest rates on the oil states in 2002. This is perhaps the most important feature of their dollar-linked currencies which are now enjoying the full benefits of the US Federal Reserve's base rate of 1.75 per cent.

In the United States cheap money is needed to fight off a slump, in the Oil States low interest rates will sustain a modest boom and may even push it higher. So AMEInfo thinks that the EIU may be too conservative in its estimates of Kuwait's GDP for 2002. Time will tell.