Kuwait’s oil production starts to climb
Budget deficit narrows to 9% of GDP last year
KUWAIT CITY, Aug 6: Despite the usual lull in activity over the summer and Ramadan periods, the economic news flow over the past two months has been broadly positive. Kuwait Export Crude oil prices have steadied at above $70/ bbl — well above startyear levels — and Kuwaiti crude production has started to climb. The stock market also saw a very strong July, helped by rising foreign interest. Meanwhile, there was confirmation of the positive impact of higher oil prices on the fiscal and external positions, with the fiscal deficit confirmed as having narrowed substantially in FY17/18 (albeit by slightly less than we had expected). On a less positive note, credit growth remains weak and real estate sales fell further in June, perhaps affected by seasonal factors.
Oil output starts to climb as OPEC targets are lifted
Latest data showed Kuwait’s oil output already started to climb in June ahead of the implementation of new OPEC+ production targets. Oil production climbed to 2.73 million b/d, up 28,000 b/d from May, its highest since the production cut agreement was made in late 2016. The increase follows the decision by OPEC and other key producers to hike output by up to 1 million b/d announced in mid-June and scheduled to take effect from July — a response to the tightening in the global oil market that has pushed oil prices to more than three-year highs in recent months.
The ultimate extent of the aggregate production increase is as yet uncertain while the group also avoided any country-specific allocations. However, our assumption is that Kuwait — one of the few participating countries with any spare output capacity — will eventually see its output rise by around 3% or 90,000 b/d from May levels to 2.8 million b/d. This would imply a potential 2.5% increase in July’s output versus June. Our recently-revised macroeconomic forecasts include a 1.5% increase in oil sector GDP this year, and combined with 3.5% in the non-oil sector, growth of 2.5% for the economy overall.
Budget deficit narrows, but less than expected
The fiscal deficit (before transfers to the Reserve Fund for Future Generations) shrunk to KD 3.2 billion (8.9% of GDP) in FY 2017/18, from KD 4.6 billion (13.8% of GDP) the previous fiscal year. The improvement was supported by a strong increase in oil revenue and rising non-oil receipts, which more than offset growing expenditures.
As expected, government revenue came in above budget, at KD 16.0 billion, thanks to higher oil prices, higher fees, and better collection efforts. Oil income was up 22%, in line with a similar increase in the price of Kuwait Export Crude. Meanwhile, non-oil income rose 21% y/y, on higher health insurance premiums for expats, and better revenue collection.
Expenditures closed at KD 19.2 billion, up 8.7% y/y and exceeding our projections thanks to a strong rise in capital spending and also rising spending on goods and services as a result of higher oil prices. 87% of budgeted construction capex was spent in FY 17/18, higher than in most previous years. Wages and salaries, the biggest component of the expenditure bill, grew by 8% y/y, boosted by rising public sector employment and possibly pension transfers.
Going forward, we continue to expect the deficit to narrow this year — despite our conservative Brent crude oil price forecast of $65/bbl (fiscal year average). But the higher spending outturn in FY17/18 represents a stronger base for spending this year. As a result, the deficit is now projected to shrink to 6% of GDP, compared to our previous estimate of 5%.
Real estate sales ease, possibly on seasonal effects
Real estate sales eased to KD 210 million in June from KD 264 million in May, the third consecutive monthly decline. The drop was due to softer sales in the residential and investment sectors, which saw notable falls of 24% and 33% m/m respectively. By contrast, commercial sales rebounded 27% from the previous month. Transaction volumes also eased back in June, particularly in the investment sector, which continued to fall after exceptionally strong performance in March and April. The latest decline in sales could be affected by seasonal factors, including the traditionally slow month of Ramadan which fell midMay to mid-June, and the start of the summer period.
After a long period of weakness, prices are showing signs of a slight pickup. Year-on-year changes in home prices turned positive in June, while residential land prices are almost flat after a two-year decline. Prices in the investment sector continue to soften, however.
Inflation edges higher in June, but remains low
Headline inflation rose fractionally in June to 0.5% y/y, but was still only slightly above the 14-year low of 0.4% recorded in May. Our measure of core inflation, which excludes food and housing, stood at 1.7%, unchanged from May but well below its average for last year.
The modest pick-up in June was driven by an easing in the rate of deflation in housing services (mostly rent) to -0.9% y/y from -1.4% in May — though the soft housing sector remains a major drag on inflation overall. This more than offset weaker price pressures in clothing (-2.0% y/y from -1.0% in May), and in the miscellaneous category (+3.2% y/y from +3.7% in May). After averaging 0.7% y/y in 1H18, we expect inflation to trend slightly higher in H2 on a modest pick-up in food prices, a further easing in declines in housing rents, while ‘core’ inflation remains close to the 2% mark. We forecast headline inflation to average 1% this year, with risks mildly to the downside, versus 3.3% in 2017. Credit growth slows again in May Credit growth slowed to a sevenyear low of 0.8% y/y in May, down from 1.5% in April. May’s deceleration was driven by a base effect following a strong increase a year earlier, but is also part of a sustained weakening of credit growth over the past few years triggered by the drop in oil prices in 2014. Most categories of lending growth softened in May, including the household sector, while business lending was affected by continued deleveraging by investment firms. However, we expect June figures to be stronger on increased lending to the oil sector.
Meanwhile, deposit growth was more or less unchanged at 3.0% y/y. Government deposits rose on the month but continued to edge lower year-on-year and their share of overall deposits at 15.8% is well below its peak of 17.1% last June. Private deposit growth stood at a solid 4.0%.
Current account surplus hits three-year high in 1Q18
The current account of the balance of payments registered its highest surplus in three years in 1Q18 at KD 1.7 billion (17% of Q1 GDP), up from KD1.2 billion in 4Q17. A rise in the trade surplus, supported by higher oil prices, more than offset a widening services deficit, lower investment income, and higher remittances. For 2018 as a whole, we forecast a surplus of 10% of GDP. Since this was based upon a conservative oil price assumption of $65/bbl for Brent (which has averaged nearly $72 so far this year), the risks to this forecast lie to the upside.
Meanwhile, the financial account deficit eased to KD 1.4 billion in 1Q18, from KD 4 billion in 4Q17. Large net portfolio outflows were slightly offset by a positive FDI balance due to divestments by residents of interests abroad. Other investment outflows, however, were minimal in 1Q18, after totaling KD 1.7 billion the previous quarter on repatriation of currency and deposits by the government (KD 1.1 billion).
Stock market enjoyed strong month in July
Kuwait’s bourse experienced its biggest monthly rise in 18-months in July, with the All-Share index climb- ing 5.7%. The strong performance was led by premier stocks, which increased 8% m/m, while the main market was up a smaller 1.4%. Banks and telecoms were the dominant sectors, while consumer goods and services were the worst performers.
The market rode the wave of growing foreign investor interest and was buoyed further by strong demand for Integrated Holding stock. July’s average daily trading value was KD 28 million, its strongest in a little more than three years.
Foreign investors are increasingly building their positions ahead of the two-stage FTSE inclusion slated to start in September, with interest stimulated further by the bourse’s addition to MSCI’s emerging market watch list late June. Meanwhile, Integrated Holding’s listing was well received by investors, with trading on its stock accounting for 16% of July’s total value traded, despite it being listed midmonth.