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Saturday, April 13, 2024

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Kuwait

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GDP: USD184.6bn (World ranking 57)
Population: 4.3mn (World ranking 128)
Form of state: Constitutional Emirate
Head of government: Meshaal al Ahmad al Sabah
Next elections: 2027, Legislative

Strengths

  • Strong oil prices and well-controlled inflation contribute to sustained real GDP growth and fiscal surpluses
  • Significant external buffers, with a substantial sovereign wealth fund and ample official reserves, provide a cushion against economic uncertainties
  • Financial institutions with strong capital and liquidity ensure stability and resilience in the face of economic challenges

Weaknesses

  • Heavy reliance on the oil and gas sector, which accounts for the majority of tax revenue, makes the economy vulnerable to fluctuations in global oil prices
  • Sluggish progress in the long-term diversification strategy, New Kuwait Vision 2035, limits options for reducing dependence on the hydrocarbon industry and for international investors at large
  • Slow-moving bureaucracy and ongoing disputes between the government and parliament hinder the progress of critical infrastructure projects and fiscal reforms

Economic overview

From surpluses to sustainable growth?

Kuwait’s economy continues to improve, thanks to strong oil prices and inflation is under control. Increases in local and foreign demand helped boost non-oil GDP growth to +4% in 2022. As a result of this and an uptick in oil production, real GDP growth in 2022 jumped to +8.2%. Growth in non-oil GDP is expected to remain robust, driven by domestic demand and steady over the medium term. In contrast, growth in oil GDP is likely to fall owing to production cuts, with a current level of 2.5mn barrels per day (mbd) on average, compared to a previous average of around 3mbd. We expect overall GDP growth to remain below the historical average of +2.8% in 2024 after an estimated stagnation or mild recession in 2023, confirming the volatile nature of Kuwait’s GDP.

Inflation is kept in check with the support of monetary policy tightening and the peg to a basket of currencies, resulting in a stable level of KWD0.3 per USD throughout the past eight years. Subsidies for staples such as rice and sugar, as well as controls on domestic fuel prices, have also helped counterbalance volatility in international prices. Core inflation (excluding food and transportation) has been falling since Q2 of 2022. We project an average inflation rate of 3% for 2024.

Both the external and internal balances have improved and external buffers are growing. In 2022–2023 (April–March), the government reached a surplus of +23.4% of GDP, thanks mostly to high oil income but also to expenditure discipline, which should have allowed it to transfer the equivalent of more than 10% of GDP to the sovereign wealth fund. The size of the sovereign wealth fund is more than five times that of GDP. The current account surplus surpassed 30% of GDP in 2022, thanks in large part to rising oil revenues and is estimated to have remained high in 2023. The country’s official reserves alone amounted to around USD50bn as of the end of 2023, equal to ten months of projected imports. Financial institutions have ample capital and liquidity and provisioning ratios for non-performing loans are stable.

The opposition-dominated single-chamber parliament approved the 2023–2024 (April–March) budget in August after continuous negotiations. Overall spending is expected to increase by +15% to about USD85bn, yet only 9.5% of the budget is allocated to capital spending, despite the need for long-delayed infrastructure upgrades and development projects. The fiscal breakeven has been conservatively set at an oil price of USD70 per barrel.

Slow progress on the path to economic transformation

The oil and gas industry in Kuwait accounts for almost 90% of tax revenue. A lengthy period of policymaking inertia means that the long-term diversification strategy, New Kuwait Vision 2035, will advance relatively slowly, leaving businesses with few options to invest in aside from the hydrocarbon industry.

In the next few years, the country is expected to continue to be led by Sheikh Meshaal al-Ahmad al-Jaber al-Sabah, 83, who succeeded his half-brother in December, or his successor. Many policies, including the so-called “Kuwaitization” of the country, are likely to continue. The Silk City megaproject and the USD6.5bn Mubarak al-Kabeer Port, both located in Kuwait’s Northern Economic Zone, are two of the most important components of the country’s five-year development plan for FYs 2020/21-2025/26 (April-March). During the anticipated period, disagreements between the government and parliament and a slow-moving bureaucracy in Kuwait will impede progress on significant infrastructure projects and the government’s fiscal reform initiatives.

The government’s work program (released in July) states its intention to create a new sovereign fund called Ciyada to implement such projects alone or in cooperation with the private sector, under the supervision of the existing sovereign fund, the Kuwait Investment Authority (KIA). Part of the revenues in excess of the break-even price should also end up in this fund, thus providing an additional buffer. This second fund would help realize the government’s long-standing goal of separating the state’s off-budget investment activities from politicized fiscal debates: the chairmanship of the KIA, in fact, passed from the Minister of Finance to the Minister of Investment and Economic Affairs in 2021.

Balancing regional normalization and national security

Short-term foreign policy objectives for Kuwait include keeping up strong bilateral ties with the US, the country’s traditional security guarantee. The continued usage of Ali Al Salem Air Base by the US gives credence to the belief that ties between the two countries will remain strong through the next presidential term (2024-2028). Kuwait is one of the Gulf Arab countries most opposed to regional normalization, as this may imply the US reducing its Middle Eastern footprint to focus on security threats in Europe and Asia. At the same time, Kuwait is unlikely to seek ties with Israel in 2024–28, while Kuwaiti-Iranian ties may improve in the medium term.

In this context, talks between Kuwait and Iran to define their maritime border have restarted. A resolution to the longrunning dispute would ease tensions with Saudi Arabia over plans to develop the Dorra gas field in the offshore portion of the Partitioned Neutral Zone (comprising acreage shared by Kuwait and Saudi Arabia), which Iran claims to be within its territorial waters to the north. Since the Iraqi federal supreme court declared a 2012 bilateral agreement on navigation rights unconstitutional, efforts to resolve demarcation issues with Iraq in the shared Khor Abdullah canal have stalled. Kuwait’s plans to expand the Northern Economic Zone logistics hub in the north of the country are at risk due to legislative resistance in Iraq and the possibility of rising nationalist sentiment in Kuwait.

Given their common interests, primarily in the oil industry, Kuwait is poised to increase its bilateral connections with Asian economies, especially China, to catalyze the development of essential infrastructure within the framework of the Belt and Road Initiative. Several agreements were signed at a meeting between the then-crown prince and Chinese President Xi Jinping in late September.

 

CEOWORLD magazine - Insights - Kuwait