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Kuwait: Oil sector growth will outweigh political gridlock

Daniel Richards - MENA Economist
Published Date: 05 July 2022


We forecast real GDP growth of 6.7% in Kuwait in 2022 and 4.1% next year, which if borne out would mark the fastest pace of growth since 2012 and cement the return to growth that began with last year’s 1.4% estimated expansion. Prior to that, Kuwait recorded four consecutive years of contraction from 2017 to 2020, but the fading of the pandemic crisis, the easing of OPEC+ curbs on oil production, and a cash injection from the highest oil prices since 2014 will all underpin the recovery. That being said, the ongoing political stalemate will continue to weigh on the non-oil sector, which we expect will see the weakest growth in the GCC this year.

Real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

Kuwait’s oil production has averaged 2.6mn b/d over January to June, marking a 12.3% gain on the first six months of 2021. Adjustments to Kuwait’s baseline production level agreed with the OPEC+ producers’ bloc and the steady easing of the group’s residual curbs on output are enabling a progressive increase in Kuwaiti output. Accounting for over half of total GDP, gains in the oil sector are the key driver of headline Kuwaiti growth, and while base effects will see the expansion rate slow over the remainder of the year (production started ticking up in H2 2021), we maintain our outlook for 10% growth in the oil sector. While some producers have been struggling to meet their quotas in recent months, Sheikh Nawaf Saud al-Sabah of the Kuwait Petroleum Corporation said at the recent Qatar Economic Forum that Kuwait has the capacity to do so.

Oil production, '000 b/d

Source: Bloomberg, Emirates NBD Research

Al-Sabah also outlined investment plans for the sector which will help maintain growth both in the near- and longer-term horizons as the country moves to offshore oil production for the first time. There are ambitious plans to boost production to 4mn b/d by 2040 with a USD 6.1bn investment over the next five years, while the development of new refineries will add further value to the crude oil being drilled. The massive windfall Kuwait and the rest of the GCC are enjoying this year as they boost production in an environment of high prices has provided significant funds for future investment (90% of Kuwait’s fiscal revenues come from hydrocarbon exports), provided the political situation does not impede this. We forecast a budget surplus equivalent to 10.4% of GDP this fiscal year, which would be the first since 2015. Partnerships will also help fund the expansion plans; earlier in 2022 the KPC signed an agreement with Japan’s Nippon Export and Investment Insurance to provide cover for financing from international banks to fund a number of projects to the tune of USD 1bn.

In contrast to the oil sector, non-oil sector growth will be comparatively weak at a projected 3.0% this year, lagging its GCC peers. A parliamentary sit-in staged by the opposition in June culminated with the dissolution of parliament by Emir Sheikh Nawaf and Crown Prince Sheikh Meshal and an early election was called with the hope that this will break the political deadlock and see lawmakers push forward with passing legislation. The protracted instability in parliament, where there have been a number of cabinet reshuffles and changes in government in recent years, will hinder its ability to invest in long-term economic diversification plans, especially as the new debt law has still not been passed. While the oil bonanza Kuwait is enjoying this year arguably makes the debt issue a less pressing one as liquidity issues abate, it will nevertheless remain a potential flashpoint with the ability to disrupt parliament, thereby impeding  other business also.

With regards the Kuwaiti consumer, households will be under pressure here as elsewhere, especially as inflation is outpacing that of the rest of the GCC despite government measures intended to keep price growth lower. CPI inflation has averaged 4.1% over January to April this year (4.7% in April), low by recent global standards but high compared to Kuwait’s usual levels and faster than its peers. Kuwait has held off introducing VAT and remains unlikely to do so in the near term and freezes on foodstuffs remain in place two years after being introduced during the pandemic crisis. This is reportedly making businesses less keen to operate in Kuwait as they struggle to turn a profit in current conditions, posing the risk of mounting shortages for key goods. Food inflation was already at 9.1% in April even with the freeze in place, making it a difficult proposition for the eventual government to deal with.