National Bank of Kuwait (NBK) has forecast the Kuwaiti economy will grow in nominal and real terms in 2016, but only if oil prices recover from levels seen at the end of 2015.
It said in an end-of year review of trends in the Kuwaiti economy that Kuwait’s GDP will grow by 6.6 per cent in 2016 to $145bn and to $158bn in 2017.
“The main downside risk to this outlook is if oil prices remain lower for longer or if they see further declines from current levels,” NBK said. “Our baseline view is that Brent will gradually improve towards an average of $55 a barrel in 2016 and perhaps $60 in 2017. A weaker oil price scenario would put added pressure on the fiscal and external positions of Kuwait and could result in more significant expenditure cuts and possibly even some reductions or delays in capital spending. Nonetheless, we think this is a risk and not our baseline at this point.”
The Brent blend crude oil was $38 a barrel on 24 December.
NBK said the pressure on the country’s fiscal and external positions remains contained and manageable. The fiscal deficit should not exceed 6.2 per cent of GDP in the fiscal year 2015/16 and is seen narrowing to under 4 per cent in the following two years.
“Thanks to large fiscal and external buffers, the government is expected to maintain a relatively supportive fiscal stance despite the decline in oil revenues. The sovereign wealth fund is estimated at over 400 per cent of GDP ($550 billion),” NBK said.
Activity in the non-oil sector has remained resilient, with growth accelerating to 4 per cent, according to an NBK estimate.
Private credit growth eased to around 6 per cent by the end of 2014 and is expected to remain relatively steady at that pace at the close of 2015. However, a large part of this slowdown in credit growth was due to a slowdown in lending to the real estate sector. Also, the credit figures have been dampened by a number of corporates resolving legacy debts predating the financial crisis, NBK said.
NBK said the robust outlook for the non-oil sector is being driven in large part by the outlook for government capital spending. Plans involve spending around KD 34 billion between 2015 and 2020.
The consumer sector has been a solid source of growth in nonoil activity and is expected to remain so in 2016 and 2017, BK said. This is supported by steady growth in employment and salaries, particularly in the government sector and among Kuwaiti households. As a result, growth in consumer spending and household borrowing has been robust. With no expectations of cuts in government wages and salaries and with subsidy reforms expected to be delayed and gradual, we see support for this sector remaining strong.
The real estate market cooled significantly in 2015 following a strong showing in 2014. Total sales during the first ten months of 2015 decreased by 29 per cent compared to the previous year.
Inflation picked up in 2015 on higher inflation in housing rent and food prices. Average inflation reached 3.2 per cent in October 2015, up from 2.8 per cent a year before. Most of the inflationary pressures have come from domestic sources. NBK expects inflation to average around 3.4 per cent by the end of 2015 and to cool off in 2016 and 2017 to around 3 per cent.
“With the government running a deficit and the current account seeing its surplus narrow considerably, there is a concern that system liquidity could be under pressure,” NBK said. “Indeed, we have already seen a slowdown in M2 growth, which has fallen from around 8 per cent in the middle of 2014 to 5.3 per cent in September 2015. Still, levels of liquidity remain relatively healthy.
The Kuwaiti dinar continued to appreciate in 2015, pulled up by a stronger US dollar; the currency rose by 2.7 per cent in trade-weighted-terms through the end of November 2015 following an increase of 3.2 per cent in 2014.
Kuwait’s stock market retreated during 2015, as low oil prices continued to weigh on investor sentiment but also pulled down by a large correction in emerging market equities.
Kuwait: key economic indicators
2014 2015 2016 2017
Nominal GDP ($bn) 164 136 145 158
Inflation (%) 3.0 3.4 3.0 3.0
Budget balance
(% of GDP) 7.5 -6.2 -3.8 -3.6
Source: National Bank of Kuwait, December 2015