KUWAIT CITY: Kuwait’s economic growth is set to maintain a healthy pace despite last year’s collapse in oil prices. 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 FY15/16 capital spending budget confirm the commitment to the ambitious investment spending targets. We think 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, asovereign 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. 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. 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. We think that pace of growth was largely maintained in 2014, supported by an accelerating pace of project implementation and a robust consumer sector.
There are signs that non oil activity may have eased slightly in Q1 from the strong pace seen in 2013 and early 2014, though this trend appears temporary and should be short-lived. Private credit growth was lower in 2014 thus far in 2015, following several years of accelerating growth. Private credit grew by 5.7% y/y through April 2015, down from growth of 8.1% in 2013 and 6.2% in 2014. Business credit (excluding personal facilities and the non bank financial sector) alone slowed to 5% y/y from 7.9% in 2013. The lower figures are largely due to the write-off of Family Fund loans by banks and to the pay-down of legacy debt by some corporates in 2014.
Adjusting for these factors, we think growth has been relatively steady through April 2015 at around 8% y/y where it should close the year. The solid pace of growth has been driven and supported by investment spending, itself due to improved implementation of the government development plan. 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 KD 34 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. The government also seeks to improve the business environment and to boost private sector participation in the economy.
This will be done largely through the public-private partnership (PPP) investment model. Legislation passed in 2014 should lead to better regulation of the PPP initiatives. The new law replaced the Partnerships Technical Bureau (PTB) with the Kuwait Authority for Partnership Projects (KAPP).The new body has greater independence and executive powers and should manage PPP initiatives more effectively. 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. Card spending growth eased slightly to 12.6% y/y in 1Q15, its slowest pace in three years. The figure points to some slowing in the consumer sector though the pace remains healthy.
Personal loan growth also slowed to a three-year low though it remained quite healthy too at 11.8% y/y in April 2015. The positive outlook in other sectors of the economy and continued support from current government spending should help support continued robust growth in the sector. 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 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. “Core” inflation (excluding food) was slightly higher at 3.7% y/y. Consumer price growth has been on a moderate uptrend over the last two years but has remained subdued thanks to low international inflation. We expect inflation to increase to an average of 3.5% by the end of 2015 on accelerating domestic activity. Particularly, we expect housing inflation to cool off later this year.