Kuwait’s non-oil growth will maintain a steady 5% in 2015 and 2016 as project implementation improves, a report said.

Kuwait’s economic growth is set to maintain a healthy pace despite last year’s collapse in oil prices, explained the latest Economic Update from the National Bank of Kuwait (NBK).

Growth, which picked up since 2013, is being supported by the accelerated implementation of the government’s development plan and a robust consumer sector. Ambitious capital spending targets have boosted aggregate investment and should continue to do so in 2015 and 2016.

The parliament’s recent approval of the five-year development plan for 2015-2020 as well as the capital spending budget for financial years (FY) 2015 and 2016 confirm the commitment to the ambitious investment spending targets.

According to NBK, the capital spending outlook will remain unchanged in the current low oil price environment.

While lower oil prices have had a significant impact on Kuwait’s fiscal and external positions, the country continues to enjoy substantial buffers that allow it to stay the course in the medium term. Indeed, Kuwait is expected to register a deficit in FY15/16, its first in over a decade.

However, a sovereign wealth fund estimated at over 300% of GDP ($550 billion), among the highest in the region, will allow Kuwait to easily finance a deficit without having to make deep cuts in spending.

Still, lower oil prices have highlighted the longer term sustainability challenges for Kuwait. As such, the government has rekindled efforts to introduce vital fiscal reform, NBK said in the update.

Those include a broader corporate income tax and a value added tax (VAT), though neither is likely before 2019. A new subsidy reform initiative is also expected, which could include a cash transfer to lower income households.

The parliament is also currently deliberating on an ambitious wage bill reform initiative which aims to standardize pay across the public sector and to increase central control over the government’s wage bill. We think authorities are serious about addressing the long term fiscal challenges facing the country and doing so in a gradual manner that does not derail the pace of growth.

Non-oil growth supported investment drive

The non-oil economy has registered a healthy growth rate since 2013, and we expect it to maintain growth around 5% in 2015 and 2016. The most recent available official data on GDP growth indicates that Kuwait’s non-oil economy grew by 5.6% in 2013.

According to NBK, that pace of growth was largely maintained in 2014, supported by an accelerating pace of project implementation and a robust consumer sector.

Investment boosted by government development plan

The solid pace of growth has been driven and supported by investment spending due to improved implementation of the government development plan, the update said.

The plan calls for both government and private investment in a host of large infrastructure projects. Following some delay in prior years, 2014 saw a pickup in the pace of implementation, with project awards rising notably in 2014. Further progress should be seen in the coming period following the legislative approval earlier in 2015 of the broad investment plan for the coming five years (2015-2020), as well as the FY15/16 capital spending budget.

The 2015-2020 development plan targets around KD34 billion ($112.2 billion) in new project spending in various sectors including oil, power generation, transportation and housing. Most of the projects in the plan have already been approved individually and have been on the government’s drawing board for several years.

Consumer sector set to continue to moderate

Growth in the consumer sector has been resilient and consistent, though we expect growth to continue to moderate. The sector will remain a key driver of the non-oil economy. Household income growth has remained supportive, with hiring among Kuwaitis and skilled expats steady. As a result, consumer spending and household borrowing growth have been healthy despite some moderation over the last year.

Real estate market cooled in early 2015

Real estate sales growth cooled thus far in 2015 following strong growth in 2014, though the commercial sector was an exception. The residential and investment sectors both cooled, with sales during the first four months of 2015 shrinking by 15% and 23% compared to the previous year.

This followed very strong growth in 2014, with sales of investment properties rising by nearly 30% last year. Meanwhile, the commercial sector continued to register robust gains in sales during the first four months of 2015, as the KD volume of registered transactions was up 21% y/y.

Inflation has picked up on domestic pressures

Inflation continued to pick up with upward pressures coming largely from domestic sources. Headline inflation came in at 3.4% y/y in April 2015, up from 2.7% a year before on stronger housing inflation.

Fiscal deficit expected in FY15/16 on lower oil prices

Kuwait is expected to record its first deficit in 16 years in FY15/16 as a result of the decline in the price of oil. Though the parliament has yet to approve the budget, government spending is expected to be lower in FY15/16; most of the cuts should be in items that would leave the outlook for the domestic economy unchanged. In particular, investment spending plans will be largely unchanged.

Brent has recovered somewhat since it bottomed early in 2015, averaging $57 per barrel thus far in 2015. Still, the price remains nearly 40% lower than a year ago. Oil revenues are expected to be 38% lower at KD13.8 billion, producing a deficit of around 4.8% of GDP.

Source: Trade Arabia