Kuwait: Missed opportunities (page 1 of 2)

Kuwait's outlook continues to be pulled in opposite directions. On the positive side, the economy realised one of it strongest economic performances in 2005/06 and the outlook remains buoyant with the oil price forecast to remain strong. However, the government has not been able forge ahead with its economic reform program owing to parliamentary opposition. This is resulting in missed opportunities, especially at a time when other GCC countries are making progress on their plans. These include maximising the hydrocarbon potential (Qatar, Abu Dhabi), diversifying their economies (UAE, Qatar, Oman) or structurally reforming the economy (Saudi Arabia).

Positively, after 3 years of robust economic performance, we expect the economy to continue to perform strongly, owing to growing oil revenues. The substantial external current account and fiscal surpluses are resulting in the build-up of financial assets. Reserves of the central bank increased to USD 9.3bn in January 2006, up 18.1% y/y. However, reserves represent only a
small amount of total assets, with substantially higher levels of reserves are being held in government funds for future generations. By law, 10% of total oil revenues have to be placed in the Reserve Fund for Future Generations. Government revenues increased by 56% y/y to USD 42.6bn in the first 11 months of 2005/06; this is the largest in Kuwait's history and almost three
times the figure estimated in the budget, which was based on a conservative oil price of USD 21pb. The budget surplus is forecast to increase in 2006/07 43.0% of GDP in 2006/07. Meanwhile on the external front, the current account surplus is forecast to grow to an impressive 49.1% of GDP in 2006, up from 43.2% in the previous year.

Furthermore, we forecast real GDP growth of 6.2% for 2006. Net exports will again make a positive contribution to real GDP growth as the oil price increases. In Q1 2006, the average price for Kuwaiti crude is estimated to have increased by around 29% y/y. Furthermore, higher government spending will also support the economic expansion, along with boosting private consumption. Early indications from the government suggest spending is slated to grow by 15.0% in 2006/07, which would be one of the strongest increases in expenditure in recent years, although the pace of growth in public expenditure will be well below the rate of revenues growth.

Inflationary concerns have risen owing to the US dollar weakness and strong domestic demand. In order to curb imported inflation, the Kuwaiti central bank revalued its currency peg in line with our call against the USD on 11th May, raising the KWD by around 1% to KWD0.28914:USD. The central bank noted that both CPI and the WPI have accelerated on the back of the USD weakening against other major global currencies. Inflation increased to 3.9% in 2005 from 1.3% 2004. Furthermore, the strengthening of the KWD against the USD, will help to maintain the purchasing power of the KWD against the currencies of its major trading partners, as well as Kuwaiti assets, with the majority of Kuwait's imports originating from Europe and Asia.

The IMF noted in 2006 that although Kuwait's medium term outlook remains positive, GDP growth is expected to slow unless the pace of structural reforms accelerates. The country's longer-term development remains hampered by structural and social rigidities such as an overdependence on oil, little private sector dynamism and an expensive welfare system (with relatively high population growth).