ZA:Kuwait's economy remains at the mercy of crude prices
If oil prices drop below the USD80-per-barrel level, Kuwait, one of the richest nations in the region, would run short of revenues to balance its USD71 billion "crazy" budget, as described by one of its members of parliament.
Amidst warnings of a contracting global economy, uncertainty about the outlook for oil demand carries great risk for a country like Kuwait. US investment bank Morgan Stanley has already cut global growth forecasts to 3.9% in 2011 and 3.8% in 2012, from 4.2% and 4.5%, respectively. It has also warned that the US and Europe are "dangerously close" to another recession.
As about 90% of Kuwait's budget relies on oil revenues, a drop in oil prices poses the highest risk for Kuwait's economy, according to Nancy Fahim, an economist for Standard Chartered bank. According to the bank's calculations, Kuwait's breakeven oil price for this year is USD81 per barrel. "But we aren't looking at an oil price collapse in the foreseeable future," she says. "Kuwait will be looking at another healthy fiscal year as its revenues are expected to exceed expenditures on the back of higher oil prices," she wrote in a recent research note.
Deutsche Bank, on the other hand, has warned of a real danger from the contracting global economy. According to a recent analysis by the bank, every percentage point of lower GDP growth is worth about one percentage point less oil demand. Adding to the gloom of the picture, the bank has also cut growth forecasts for China, a major oil importer, from 10.3% year-on-year in 2010 to 8,9% this year and 8.3% in 2012. This puts Kuwait's economy in a very vulnerable position to changes in the oil market.
The imbalances in Kuwait's economy are due mainly to the government's control of all sectors and the heavy dependence on oil exports, Kuwait's central bank governor Sheikh Salem Abdul-Aziz Al Sabah said in July. There is a very low level of participation by the private sector in the domestic economy. The private sector faces financing obstacles as banks are unwilling to lend.
Analysts agree that engaging the private sector and increasing the focus on diversification will be essential policy strategies for Kuwait to successfully emerge from the global turmoil with solid fundamentals.
Kuwait Budget
For fiscal year 2011/12, Kuwait approved a USD71 billion budget, the highest since at least 2003, amid increased warnings that the government may need to dip into assets to cover wages if the price of crude drops below breakeven.
In January 2011, the Emir announced plans to spend nearly USD5 billion, or around 4% of GDP, on grants given to the country's 1.1 million citizens and free food rations for one year until March 31, 2012.
Kuwait-based investment bank Global Investment House believes that in a worst-case scenario, if the average price of Kuwait Export Crude (KEC) decreases to USD80 per barrel, Kuwait will report a deficit of KWD403 million. However, in the remaining two scenarios for 2011/12, Global predicts surpluses in the range of KWD1.1 billion and KWD2.8 billion, after accounting for contributions to the Reserve Fund for Future Generations (RFFG). Global has forecast the average KEC prices for the year to be in the range of USD80 to USD90 per barrel.
Kuwait Development Plan
In an effort to diversify its economy from the heavy dependence on the hydrocarbon sector and to handle the recessionary pressures being faced the 2008 financial crisis, the Kuwait Development Plan was initiated in February 2010. The plans run up to 2013/14 and allows the government to spend between KWD30 billion and KWD35 billion over the period.
Kuwait's real GDP is expected to achieve an average growth rate of 5.1% from 2010/11 to 2013/14, according to Global estimates. During the same period, non-oil GDP is expected to grow at an average rate of 7.5%.
"One of the KDP's main goals is to expand the private sector and increase its role in the country's economic growth. By implementing this strategy, the real GDP of the private sector is expected to grow at average rate of 8.8%, while the public sector is expected to grow by 2.7% from 2010/11 to 2013/14. Additionally, the private sector's contribution to GDP will equal 44% in 2013/14, compared to 37% in 2008/09," according to an April 2011 report by Global.
However, the private sector faces funding challenges as banks are unwilling to finance their projects. According to local media agency KUNA, a recent analysis of Kuwaiti banks' loan portfolio showed that credit policies in giving loans were still "conservative".
In January 2011, the Emir announced plans to spend nearly USD5 billion, or around 4% of GDP, on grants given to the country's 1.1 million citizens and free food rations for one year until March 31, 2012.
Kuwait-based investment bank Global Investment House believes that in a worst-case scenario, if the average price of Kuwait Export Crude (KEC) decreases to USD80 per barrel, Kuwait will report a deficit of KWD403 million. However, in the remaining two scenarios for 2011/12, Global predicts surpluses in the range of KWD1.1 billion and KWD2.8 billion, after accounting for contributions to the Reserve Fund for Future Generations (RFFG). Global has forecast the average KEC prices for the year to be in the range of USD80 to USD90 per barrel.
Kuwait Development Plan
In an effort to diversify its economy from the heavy dependence on the hydrocarbon sector and to handle the recessionary pressures being faced the 2008 financial crisis, the Kuwait Development Plan was initiated in February 2010. The plans run up to 2013/14 and allows the government to spend between KWD30 billion and KWD35 billion over the period.
Kuwait's real GDP is expected to achieve an average growth rate of 5.1% from 2010/11 to 2013/14, according to Global estimates. During the same period, non-oil GDP is expected to grow at an average rate of 7.5%.
"One of the KDP's main goals is to expand the private sector and increase its role in the country's economic growth. By implementing this strategy, the real GDP of the private sector is expected to grow at average rate of 8.8%, while the public sector is expected to grow by 2.7% from 2010/11 to 2013/14. Additionally, the private sector's contribution to GDP will equal 44% in 2013/14, compared to 37% in 2008/09," according to an April 2011 report by Global.
However, the private sector faces funding challenges as banks are unwilling to finance their projects. According to local media agency KUNA, a recent analysis of Kuwaiti banks' loan portfolio showed that credit policies in giving loans were still "conservative".
