NBK, outlook bright despite Iraq worries (page 1 of 2)

High oil prices kept budget and export revenues buoyant and UN Compensations Committee (UNCC) payments flowing. Added liquidity has contributed in part to making the Kuwaiti stock market one of the best performing markets worldwide in 2001 and 2002. NBK expects the economic recovery to stay on track, precluding a prolonged conflagration in Iraq physically impacting Kuwait or derailing the anticipated global economic recovery.

However, factors lending strength to oil prices and contributing to fiscal and external surpluses in the short term are likely to weaken the prospects for Kuwait's future in the long run notes NBK.

Firstly, OPEC's success in maintaining oil prices in the desired range is likely to be at the expense of market share in the long-run, mainly lost to Russia. Secondly, easy fiscal conditions make it more difficult for the government to push through its economic reform program on the grounds of economic necessity. The more such reforms are delayed, the harder the process becomes.

Kuwait's budget surplus of KD 0.6 billion in fiscal year (FY) 2001/2002 was substantially better than the official projected deficit of KD 1.8 billion before the 10% allocation to the Reserve Fund for Future Generations. Nevertheless, the surplus was significantly lower than the previous year's, representing only 6% of 2001 GDP versus 22% a year earlier. NBK expects another moderate surplus in the current FY.

The current account can also be expected to record a similar surplus to last year's KD 2.6 billion, while GDP growth recovers to positive territory. GDP contracted by 9% to KD 10 billion in 2001 on the back of a 15% drop in oil prices. In real terms, GDP is reported to have contracted by only 1%. A higher oil price is one factor behind NBK's projections, with KEC likely to remain above the year to date average of $23.

Another factor is the complete restoration of refining capacity by end September at Mina Al Ahmadi refinery following the June 2000 explosion.

Outside the oil sector, economic activity held little surprises in 2001. Non-oil GDP grew at 2.8% in line with its average for the previous 2 years. Most of the growth was in community, social and personal services. Private sector activities showing higher growth were communications and trade.

The pattern should continue in 2002 with a pick-up in government spending and hiring boosting domestic demand and economic activity.

Government spending in FY 2001/2002 grew by 12% to roughly 4.7 billion, though remained 10% below budget. The wage bill stood at KD 1.5 billion, up by 4%, though all employment-related spending accounted for approximately half of total government expenditures. Wage increases in the current fiscal year are budgeted at 3% in line with total spending growth.

For the first time in 4 years, capital expenditures registered positive growth. While two thirds of the 42% increase was in land purchases that have limited impact on economic activity, spending on development and maintenance projects received a long-awaited boost. Still, spending remained 30% below budget. NBK expects growth to continue with next year's budget increase by 15%.

Growth in consumer spending rose in 2001 to 3.6%, after slowing down slightly in the previous 3 years largely a result of a drop in the size of the expatriate population. NBK expects consumer spending to be more robust in 2002 following accelerating growth in the size of the expatriate population and in public sector employment of nationals during the 12 months ending June 2002, in addition to the rapid increase in consumer and housing loans.

NBK estimates that the relaxation of the central bank's regulatory limits on consumer loans raised their annual growth rates to the tune of 20%-25% in 2001 and 1H02.