Kuwait - The latest Economic Insight report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics, reveals a positive economic outlook for Kuwait boosted by rising oil prices and increasing oil. This has led to a much higher GDP growth forecast of 7% for 2022, compared with 2.5% in 2021. For the Middle East, the report reveals a positive regional outlook despite a darkening global landscape as market pressures mount and uncertainty heightens. Middle East GDP growth in 2022 is now projected at 5.2%, an increase of 1 percentage point on Oxford Economics’ forecast three months ago. 

According to the report, the scrapping of all Covid-restrictions has supported a strong bounce back in economic activity following a modest retraction in Q1. This has seen the non-oil sector expand 4.7% this year, following growth of 3.1% in 2021, as consumer spending increases and the real estate market remains robust.

The oil sector, which accounts for over half of Kuwait’s GDP, is the main driver of its economic growth, with the sector expected to see year-on-year growth of 11.8%. This is a significant recovery following a 10% decline in 2020 and subdued growth of 0.1% in 2021. Kuwaiti oil output has risen to above 2.6 million barrels per day, as OPEC+ continues to gradually increase production quotas. With Brent Oil forecast to remain over $112 per barrel in 2022 – significantly above Kuwait’s estimated break-even price of $65 – the government is expected to post its first budget surplus since 2014, at 6.2% of GDP.

Oil income has buoyed fiscal performance, allowing the nation to recover from its record budget deficit of KWD10.7 billion posted in 2020. The spike in oil prices has boosted liquidity and allayed pressures to reduce current spending on wages and subsidies, which currently accounts for 90% of total expenditures. Future surpluses will be used to replenish the General Reserve Fund, which has been critical in funding shortfalls in recent years.

The state’s ability to implement important policy reforms, including fiscal adjustment, has been hampered by frequent cabinet reshuffles and administration changes. Although significant reforms appear unlikely in the near-term, ICAEW expects the latest public debt law proposal to be passed through the parliamentary committee. This will allow the government to borrow internationally

Diversify
economy Vanessa Heywood, ICAEW Head of Middle East, said: “While Kuwait’s overall GDP growth remains tied to oil performance, it is the improving growth of its non-oil sector that should be the main takeaway from the report. With oil prices set to remain high, the government will need to seize this opportunity to diversify the economy and continue its non-oil expansion.” Scott Livermore, ICAEW Economic Advisor, and Chief Economist and Managing Director, Oxford Economics Middle East, said: “Kuwait has welcomed rising oil prices and growing output, as the economy is driven by its hydrocarbon sector. The completion of the Al-Zour refinery will come at an opportune time, expanding Kuwait’s total capacity for refining oil by over 0.6 million barrels per day to 1.4 million barrels per day, as OPEC+ signals a willingness to ease global production concerns.”

Kuwait’s Covid-19 booster campaign has appeared challenging, with less than 10% of the population receiving a third dose of the vaccine. While an oil downturn remains the greatest risk to the economy, the country could also be more vulnerable to the impact of new Covid variants than other neighbouring states. In line with regional and global trends, Kuwait is experiencing rising inflation, primarily driven by increasing food and transport prices.

Although however, core inflation is now rising at a faster pace too, showing price increases are broad-based. Inflation will remain elevated into the second half of the year, when it will likely start to ease as supply chain disruptions fade. Overall, inflation is expected to average 3.9% this year compared with 3.4% in 2021.

According to the report for Q2, Middle Eastern countries are having to adjust to pressures stemming from the ongoing Russia-Ukraine conflict, China’s economic slowdown and the tightening of global market conditions. However, the rise in oil prices has provided strong support to the macroeconomic environment across the Gulf, which is being used to offset the impact of rising inflation and supply chain disruptions to regional commodity importing countries.

That being said, a scenario in which several large economies slide into recession would weigh on oil demand and test the GCC’s resilience. Inflated oil prices have led to improved GDP growth prospects in Saudi Arabia, where output is forecast to expand by 7.1%, compared to 4% previously. There is also optimism in the UAE, where government reform agendas and a rise in oil output are expected to underpin growth of 6.7% this year. The higher income from hydrocarbons means that all six GCC nations will likely post budget surpluses, despite rising expenditures. However, this is unlikely to impact on spending plans, with most of the windfalls earmarked for debt repayments. This should see debt-to-GDP ratios decline across the region.

Non-oil growth
Non-oil growth also continues to show strong signs across the GCC and ICAEW’s 2022 forecast for GCC non-oil activity stands at 4%, rising from 3.4% three months ago. Recent S&P Global’s Purchasing Managers’ Index (PMI) survey in the UAE and Saudi Arabia indicated signs of business activity softening, as global headwinds take a toll on confidence, but they still remain firmly in expansion territory. In Qatar, an upswing in demand pushed the PMI to a survey high in May. Despite this apparent resilience, many firms are bearing the brunt of rising costs to allay pressure on consumers, which is beginning to weigh on employment.

Vanessa Heywood, ICAEW Head of Middle East, said: “The Middle East is faced with an interesting dilemma. Geopolitical turmoil has brought the GCC nations to the international negotiating table to aid global oil supply challenges. But hiking up oil production counteracts the region’s long-term strategy of diversification. It is also important to note that the Middle East sits in an ecologically sensitive part of the world and is therefore more susceptible to climate change. While inflated energy prices will support its renewable energy transition, the region’s Leadership has demonstrated resistance to delaying the progress being made in its energy transition, even as global pressures mount.”

Scott Livermore, ICAEW Economic Advisor, and Chief Economist and Managing Director, Oxford Economics Middle East, said: “The GCC economy has seen an impressive bounce back from the disruption caused by the Covid-19 pandemic and has appeared steady despite global headwinds from prolonged market instability. Growth in the oil sector has largely been the driver of the region’s success, although Saudi Arabia recently gestured its willingness to help control rising oil prices – an indication that the region is concerned about the impact of a recession in key economies.”

Rising commodity prices, caused by the Russia-Ukraine conflict, have buoyed the GCC’s fiscal and external balances but have subsequently caused inflation rates to increase. ICAEW predicts GCC inflation to average 3.1% this year (forecast was 2.7% three months ago), up from 2.3% in 2021, before falling back to 2.5% in 2023. The GCC’s US dollar currency pegs have meant the region’s monetary authorities have been forced to follow the United States Federal Reserve rate hikes in March and May. The Federal Reserve has displayed intent to tame the significantly high inflation in the US, with rate hike increases expected to total 2.5 percentage points this year. The resulting rise in financing costs may dampen the non-oil recovery in 2023 but it should not pose an immediate risk to the region’s growth or continued expansion.

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