Kuwait’s growth in non-oil activity is expected to have improved to 3.0 per cent in 2017,with growth seen accelerating further to 3.5-4 per cent in 2018 and 2019, said the National Bank of Kuwait (NBK) in its latest Economic Update.

The state’s economy continues to bounce back from a 2015 slowdown, which was induced by a fiscal adjustment in the wake of the decline in oil prices, it added.

The key driver has been capital spending, bolstered by the improving implementation of the government’s National Development Plan. A shift toward a more gradual fiscal adjustment should also reduce the drag on growth while ensuring continued progress on reducing the fiscal shortfall.

Substantial fiscal buffers, including large foreign reserves and a relatively low fiscal breakeven oil price, provide Kuwait with significantly more space to move gradually on fiscal adjustment than some of its GCC neighbours.  As a result, authorities are keen to maintain their commitment to their capital spending plans and to continue absorbing the bulk of Kuwaiti entrants into the labour market.  At the same time, the government is pushing forward with needed structural reform in an effort to encourage the private sector to play a larger role in generating new jobs in the medium-to-long-term.

The outlook is not without its risks. Indeed, the robust growth outlook depends on a continued commitment to the projects pipeline and the ability by the various authorities to push that ahead despite bureaucratic and sometimes political resistance. Though we think this risk is low in the medium-term, it could certainly materialize.

Meanwhile, though the probability of oil prices moving much lower from current levels has receded for now, it remains a distinct risk. While Kuwait would be able to sustain $20 oil for some time, such a scenario is certain to alter the government’s fiscal policy and hurt sentiment, with the consequent impact on non-oil activity.

Non-oil growth to improve further in 2018 and 2019

After slowing in 2015, the pace of non-oil GDP growth improved to 2.0 per cent in 2016. Non-oil growth had dropped to 0.4 per cent in 2015, a figure which caught most analysts by surprise, including the IMF.

The slowdown was largely a result of government spending cuts implemented in the wake of the mid-2014 decline in oil prices. Those cuts, which largely spared capital spending and the government wage bill, reduced spending excluding energy subsidies by 10 per cent in FY15/16.

The fiscal adjustment has since been far smaller. There was still a decline in spending by around 2.9 per cent in FY16/17, but outlays are expected to return to positive growth in FY17/18 and beyond. This shift to a more supportive fiscal stance should increasingly support non-oil growth in 2018 and 2019. That, combined with continued strength in project implementation and a recovering consumer sector, should help sustain non-oil growth at 3.5-4 per cent in 2018 and in 2019.

Government project activity remains healthy

Over the last few years, an improved pace of capital spending has been a key driver of the non-oil economy. We feel that that momentum has been sustained and should continue to provide solid impetus to the economy through 2019 and possibly beyond. We estimate that over KD 28 billion worth of projects are likely to have been awarded during the last five years through the end of 2017. While the pace of project awards has slowed, the impact on growth is likely to be sustained in the medium term.   

The projects pipeline remains solid, with the government still strongly committed to the ambitious capital spending program in the National Development Plan. The plan, as part of Kuwait Vision 2035, seeks to transform the country into a financial, cultural and trade leader and includes capital spending on infrastructure, housing, power and water, and the oil sector. Around a third of the spending is slated to come from public-private partnership (PPP) projects. Though progress on the PPP projects has been slow, it is expected to pick up.

Consumer sector bouncing back after slowdown

The consumer sector, long a robust and reliable source of growth, appears to be bouncing back after a period of slowdown. The sector was hit in 2015 and 2016 as a consequence of the decline in oil prices. This happened as households took a more cautious view, with the Arab consumer sentiment index falling to a low of 83 in September 2016. A year on and the index has improved significantly; the index hit 110 in September 2017.

The consumer sector continues to be well supported by steady growth in employment and salaries, particularly in the government sector and among Kuwaiti households. Employment growth among Kuwaiti nationals remains relatively solid, with public sector employment growing by around 2 per cent y/y through June 2017. Expatriate employment has slowed but remains healthy at 3.6 per cent y/y.

Real estate market appears to be turning a corner

The real estate market has been showing evidence of improvement following more than two years of weakness. Sales for all sectors during the three months through October 2017 were up 33 per cent y/y.

Real estate prices also appear to have stabilized, after undergoing an orderly 15-20 per cent correction since 2014. NBK’s real estate price indices now show prices down 1-6 per cent from a year ago, compared to declines of 6-13 per cent y/y at the end of 2016. – TradeArabia News Service