Kuwait: Bigger budget for FY2022 but political gridlock remains a concern

Kuwait announces bigger budget for FY2021/22

Kuwait’s draft budget for the coming fiscal year starting 1 April 2021 shows a deficit of KWD 12.1bn (USD 40bn), smaller than the official projection of KWD 14.0bn in the 2020/21 fiscal year. Both revenue and expenditure are set to rise from the 2020/21 budget, which had to be reduced following the sharp Covid-related drop in oil prices in Q2 2020.   Our forecast for the current fiscal year ending 31 March 2021 is smaller at KWD 10.1bn as the budget assumed a conservative oil price assumption of USD 30/b whereas the actual average oil price is closer to USD 45/b.  We estimate Kuwait’s budget deficit to reach -30.7% of GDP in the FY ending March 2021.

The 2021/22 budget assumes an average oil price of USD 45/b, lower than our forecast of USD 51/b.  We also expect spending to be lower than budgeted as government may be constrained by the inability to issue debt (more on this below).  As a result, we expect the budget deficit in 2021/22 to be smaller than the official estimate at KWD 8.6bn or -24.2% of GDP.  According to Bloomberg reports, Kuwait will not transfer 10% of its oil revenue to the Future Generations Fund in the coming fiscal year, which should help to cover the budget shortfall. 

Political gridlock could weigh on execution of the budget

Parliament has yet to approve a new debt law that would allow Kuwait to tap bond markets for financing and it is unclear how Kuwait plans to finance the rest of the budget deficit if the law is not approved.  While the finance ministry has said that it looks forward to “more cooperation and collaboration with Kuwait’s parliament to introduce and amend more laws that will benefit and improve [the] fiscal framework”, recent developments in the political sphere suggest such cooperation is unlikely in the near term.

Following the December 2020 election - where two-thirds of incumbent MPs lost their seats – a new government was formed under PM Sabah Al Khalid.  The government lasted just over a month, resigning on 13^th January after being challenged by parliament.  Sheikh Sabah Al Khalid has been tasked with forming a new government but it remains to be seen whether parliament will be willing to work with the new administration on fiscal reform, including passage of the debt law.

Growth in 2021 to be constrained by modest increase in oil production

Kuwait’s oil production in 2020 averaged 2.4mn b/d, down more than 10% from 2019.  As non-oil sectors were also negatively impacted by the global pandemic, we estimate real GDP contracted -7.4% in 2020.  Given the extended restrictions on oil production in Q1 2020, we expect Kuwait’s oil sector to grow only 0.5% this year, while the non-oil sector is likely to rebound 2.5%.  Overall, we expect Kuwait’s economy to grow 1.5% in real terms in 2021, which would make it the slowest growing economy in the GCC this year.