Kuwait's non-oil real growth is anticipated go up to 5.6 percent in 2015-2016, as implementation of the government's development projects maintains its robust pace, a National Bank of Kuwait (NBK) report showed here on Wednesday.
Real non-oil growth accelerated notably in 2013 and is expected to maintain a more robust pace in the coming period. The improved growth is driven by capital spending and the government's ambitious development plan, it said.
The consumer sector remains a strong driver of economic growth, though it has moderated since 2013. While large pay hikes for Kuwaitis are not expected in the near term, household income growth will remain healthy supported by robust employment growth, it added.
Risks for Kuwait remain subdued in the near term, with Kuwait's fiscal position allowing it to navigate the recent decline in oil prices relatively well, as the government is already looking at measures to boost non-oil revenues and limit spending growth in the coming years, it said.
The latest official figures show that other indicators have also reflected the pick-up in economic activity and the accelerating pace of growth. Private credit growth has been picking up gradually, reaching 7.7 percent y/y in September 2014, it said.
Growth in domestic demand slowed somewhat in 2013 following strong growth the year before. Domestic demand rose by 5.7 percent in real terms in 2013, following 9 percent growth in 2012. Most of the moderation came from slower growth in private consumption. Government current spending growth also slowed but maintained a rapid pace of 10 percent, it added.
Meanwhile, momentum in investment is rising, both from government and private sources. Total investment spending in Kuwait grew by 6.2 percent in real terms in 2013 (nominal growth topped 10 percent), the report indicated.
Implementation of the government's development plan has been picking up, and momentum is expected to improve further in 2015 and 2016. The government recently presented its second five-year plan to cover the period from FY15/16 through FY19/20. National Assembly approval is expected early in 2015.
The plan targets investment of KD 11.8 billion a year over the five year period. Even a more realistic execution at around 80-85 percent of the target will have a positive impact on growth. The plan projects non-oil growth of around 10 percent y/y, though growth is more likely to average around 6-8 percent instead, it said.
Some of the important projects that have recently been awarded include KNPC's clean fuels project and the first phase of the Al-Zour North IWPP. The clean fuels project, to cost KD 4.6 billion, was awarded in 1Q14 and should boost Kuwait's oil refining capacity by 2018. The Al-Zour North IWPP, the first private investment in the country's power and water sector in recent history, was also awarded early in 2014 and promises to kick start the "public-private partnership" (PPP) model that the government plans to use extensively in upcoming projects, it noted.
Investment levels in Kuwait have been at historic lows in recent years when compared to GDP. Total investment averaged 13.5 percent of GDP between 2011 and 2013. As a result of the development plan's improving implementation, this ratio is expected to rise to 18 percent in the next five years. While this will bring it closer to the GCC average, Kuwait will still trail other countries in the region.
Kuwait has maintained a budget surplus throughout the last 15 fiscal years, with an average surplus of 21 percent of GDP. The latest fiscal year (FY13/14) ending in March 2014 achieved a surplus of 26 percent of GDP. This has happened despite healthy spending growth that topped 11 percent over the last 14 years, the NBK report said.
While the retreat in oil prices has not pushed the government budget into deficit, the cabinet is already looking at ways to limit spending growth in FY15/16. The initial spending proposal for FY15/16 is 5.6 percent lower than the prior year's budget at KD 21.9 billion.
The cabinet is proposing to cut spending by as much as 15 percent at various ministries, with a focus on cuts in subsidies, reductions in expat hiring and a freeze on general pay raises. Importantly, the cabinet has reiterated its commitment to leave capital spending plans untouched, which should ensure that the medium term growth outlook is unaffected, it showed.
Kuwait's fiscal position is bolstered by substantial public sector wealth. It maintains a sovereign wealth fund estimated at KD 154 billion, or 310 percent of GDP. This, in addition to the country's relatively comfortable fiscal outlook, have helped Kuwait maintain a sovereign rating just two notches below AAA, with Moody's giving it a Aa2, and S&P and Fitch rating it AA.
Inflation in consumer prices has remained subdued at around 3.0 percent y/y in October 2014. Core inflation was slightly higher at 3.1 percent y/y. Inflation has generally remained under control thanks to low inflation internationally and easing domestic pressures, especially in residential rents. Inflation is expected to remain around current levels in the coming period, it added.
The Kuwaiti dinar has strengthened somewhat over the last few months, in large part due to the stronger dollar. The dinar, which is pegged to a basket of major currencies, has declined against the USD since June 2014 but has moved up against all other major currencies, the report concluded.