Economic Studies
Kuwait

Kuwait

Population 4.6 million
GDP per capita 30,969 US$
A3
Country risk assessment
A3
Business Climate
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Synthesis

major macro economic indicators

 

  2017 2018 2019 (e) 2020 (f)
GDP growth * (%) -3.5 1.2 0.6 3.1
Inflation (yearly average, %) 1.5 0.6 1.5 2.2
Budget balance (% GDP) 6.3 8.7 6.7 3.8
Current account balance (% GDP) 8.0 14.4 8.2 6.8
Public debt (% GDP) 20.7 14.7 15.2 17.4

(e): Estimate. (f): Forecast. *2020 year runs from 1st April 2020 to the 31st March 2021.

STRENGTHS

  • Vast financial buffers offsetting low oil prices, positive international investment position
  • Improvements in economic diversification efforts
  • Low inflation environment, high living standards
  • Low social discontent

WEAKNESSES

  • Still high dependence on oil in terms of exports and fiscal revenues
  • Slow pace of economic reforms
  • State-dominated economy, discouraging long and slow bureaucracy for the private sector
  • Political frictions between executive and legislature

Risk assessment

Government spending will sustain growth

Kuwaiti growth performance had been hit in 2019 on the back of lower oil prices and production cap within the OPEC+ agreement. In case of an extension of OPEC-led production cuts and low oil prices, the growth performance of the country will remain under pressure, as oil accounts for nearly half of GDP. Yet these impacts are expected to be relatively offset by vigorous fiscal spending. Private consumption, which accounts for around 40% of GDP would stay robust based on the expectations that the public sector wages (17% of GDP) will remain intact and that the government will shy away to introduce some fiscal austerity measures. Slight pickup in non-oil activity, such as services, manufacturing and construction, thanks to the infrastructure projects (railroad, Mubarak Al-Kabeer port, International Airport and Fahaheel expressway expansions) will also support economic growth. Nevertheless, the increase in global investment will remain limited while export growth will be sluggish due to OPEC-led production cuts. Indeed, around 90% of export revenues come from hydrocarbon sales. Inflation is expected to inch up in 2020 on the back of strong fiscal stimulus but will remain subdued. The Central Bank of Kuwait (CBK) cuts its policy rate slower than the US Fed. In 2019, the US Fed cut its rates three times whereas the CBK cut them only once in October. This trend is expected to continue in 2020.

 

Large financial buffers remain in place, yet financing need remains large

The increase in oil prices in 2017 and 2018 helped Kuwait to improve its overall fiscal balance. The country benefits from one of the lowest fiscal break-even price across the GCC estimated at USD 54.7 per barrel as per the IMF. By law, 10% of total annual revenue is transferred to the Future Generations Fund (FGF) regardless of the level of oil prices and the overall fiscal balance. However, fiscal financing needs, which indicate a deficit after transfers to the FGF and before inclusion of FGF investment income, show an uptrend. Kuwait would also benefit from efforts of diversification of fiscal revenues that depend currently, by around 70%, on oil hydrocarbon revenues. In order to do so, the country is expected to implement a tax on tobacco products as well as energy and carbonated drinks from April 2020, and a 5% value added tax regime from April 2021 onwards. Kuwait will continue to record a current account surplus with oil exports being the main source of revenues. Yet the pace of growth of current account surplus to GDP ratio is expected to decelerate in line with low oil prices. With the implementation of Kuwait National Development Plan (KNDP), import demand related to construction activity is expected to increase, trimming slightly trade surplus. Worker remittances also represent a source of capital outflows, as they rose by 3.9% to nearly USD 14 billion in 2018 from a year earlier, a trend that is pushing the authorities to discuss the introduction of a 5% tax on these transactions. Outflows from the financial accounts continued in 2018, rising to USD 24 billion from USD 17 billion in 2017.

 

Political risks related to succession remain limited

Kuwait is a constitutional emirate with a parliamentary system of government. The political system relies on a hybrid of hereditary monarchy and democracy. The Head of State is the Emir Sabah al-Ahmad al-Jaber al-Sabah who appoints a Prime Minister. The Emir, on the recommendation of the Prime Minister, appoints the ministers of the cabinet. Currently, the risks related to a disruptive succession remain limited. The elected parliament has an important power over the policy making process, challenging the government. Frictions between the executive and the legislative will continue to represent the principal risk to Kuwait’s policy continuity.

 

Last update: February 2020

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