Oil price drop could trigger output cuts

CBK new regulations to boost lending

Report prepared by NBK KUWAIT CITY, Nov 24: Oil prices sank in October, reversing all of the gains made since August amid the prospect of rising supply. Falling oil prices could yet trigger OPEC production cuts that would lower Kuwait’s headline GDP growth. Moreover, the narrowing in the budget deficit forecast for this year versus last — although still considerable — will be reduced, with the prospect of a balanced budget for the first time in four years now more remote.

Financial news in October was dominated by the major sell-off in global markets, triggered by a combination of fears over world growth and the prospect of higher interest rates. Markets in Kuwait were drawn into the sell-off, with the local stock market down 1.7% though outperforming most of its GCC peers. This volatility is unlikely to have a major bearing on the underlying economic outlook in Kuwait however.

production in the Neutral Zone.

Real estate sales stabilize after

volatile summer

Real estate sales appeared to stabilize in September after a volatile couple of months, reaching a solid KD 200 million, up 52% from August. Activity was driven mainly by higher sales in the residential and investment (i.e. apartment) sectors, which increased by 46% and 71% m/m respectively, though August was an exceptionally slow month. The rise in aggregate sales was due to a rise in the volume of transactions, which at 441 stood close to its average of the first half of the year. Sales levels also rose by 38% y/y, further evidence of a sector gradually building on the recovery that started last year.

Price changes meanwhile were mixed in September. Prices in the investment sector appear to be picking up, with individual apartment prices for example rising for the third consecutive month after having fallen earlier in the year. Prices were supported by stronger activity, possibly on the back of improving investor sentiment together with a better economic backdrop. Residential prices on the other hand are still showing weakness, despite improving sales, and are still slightly negative on a year-on-year-basis.

Project awards reach KD 1.1 billion in first three quarters

Project awards in 3Q18 were higher than the previous quarter (a multi-year low), but remained relatively weak at KD 380 million. This was around half the average level of awards per quarter in 2017, for example. Technical delays and cancellations have been at the root of the drop in awards in all quarters since the beginning of the year, with scheduled projects shifted to later in the year. Year to date, project awards are valued at KD 1.1 billion, only 29% of the KD 3.8 billion that had been planned for 2018. At this pace, it is unlikely that the planned figure will be achieved by year-end. Looking forward, the pace of project awards — although not guaranteed — is expected to pick-up in coming quarters, according to MEED’s project database.

Consumer spending growth

eases further

Growth in consumer spending bounced back in October, to 2.6% y/y from 2.4% the previous month, helped by the return of travelers and the beginning of a new academic year. The pick-up was led mainly by strong auto sales (+13% m/m). Consumption of services (+1.7% m/m) was modest, while non-durable spending (-0.5%) declined for a third consecutive month. The latter has struggled to maintain the strong momentum it experienced earlier in the year. Nonetheless, despite the overall softer dynamic, a moderate rebound in spending is still projected and it is seen finishing the year up 4-5% helped by strong confidence, good job growth, and low inflation.

Inflation drops sharply in September

Headline inflation fell in September to a 14-year low of 0.3% y/y from 0.9% in August. (Chart 5.) The drop was partly caused by weaker housing inflation which fell to -1.5% from -0.9% the previous month, and weaker food price inflation, which stood at 0.4% from 1.4% in August. The drop in housing inflation was entirely due to a base effect following a rise in September last year, as housing rents held steady from the previous month. Food price inflation, on the other hand, eased on the back of much softer fish and seafood prices, which have returned to somewhat normal levels following the spike in fish prices observed in July. However, underlying inflationary pressures also eased. Inflation excluding food and housing — one measure of ‘core’ inflation — fell to 1.5% y/y from 1.9% the previous month on lower inflation in most other categories, especially clothing, transportation and miscellaneous items.

It would now require some sizeable price increases in the final three months of the year to meet our year average inflation forecast of 0.8% for 2018 as a whole. A slightly lower number of 0.6-0.7% looks more likely.

Credit growth dips, perhaps linked to seasonal effects

Credit growth eased to 1.7% y/y in August from 2.4% in July. This was due to an across-the-board easing in lending to businesses (1.6%) and households (6.0%), and also a further decline in credit for the purchase of securities (-8.1%). Most business sectors saw little-to-no growth, but borrowing by the trade sector declined by a notable KD 36 million. Meanwhile, private deposits were down as well, shedding KD 140 million on the month due to a dip in savings deposits, taking growth to 4.7% y/y — money supply growth as a consequence eased to 4.4%. The weaker credit and deposit figures may have been affected by the small number of working days in August due to public holidays.

The Central Bank of Kuwait adjusted its lending regulations recently, bringing them in line with recent economic developments. Borrowers can now borrow up to 25 times their salary or a maximum of KD 25,000, up from 15 times or maximum of KD 15,000. The central bank will also now only require proof of purchase documents for housing-related loans, relaxing restrictions on borrowing for non-housing purposes.

Equity prices ease amid net

foreign selling

The Boursa Kuwait All-Share index was down 1.7% in October, due in large part to a drop in the premier market (-2% m/m), and affected by the global equity sell-off. Indeed, foreigners (GCC and others) sold-off close to KD 20 million over the month, potentially shaken by the return of global volatility. Kuwait underperformed relative to the MSCI GCC index, which was up 1.2% m/malbeit skewed by a rise in the Qatari market; but most other Gulf markets were also down. Nonetheless, foreign inflows year-todate remain healthy at KD 122 million. Meanwhile, lower equity prices were reflected in a drop in market Nominal GDP Oil Non-oil

Real GDP Oil Non-oil Private credit Money supply (M2) Inflation (% y/y, average)

Inflation (% y/y, e.o.p.)

capitalization, which stood at KD 28.7 billion, down 2.1% from September.

Liquidity also eased to an average daily traded value of KD 13.5 million in October, around half its level the previous month when Kuwait completed the first half of its ascension to the FTSE EM index. Although the positive stimulus from the index inclusion has supported the market in 2018, with year-to-date returns still

Fiscal balance (before FGF transfers) 26.1 Revenues 65.7 Oil 61.5 Non-oil 4.2 Expenditures 39.6 Transfers to Future Generations Fund 16.4 Fiscal balance (after transfers to FGF) 9.6 Investment income* 5.9 Public debt 3.2 Current account balance 45.5 Goods balance 54.8 Exports 68.7 Imports 13.9 Services (net) -7.0 Investment income (net) 7.3 Worker remittances -9.6 Exchange rate (KD per 1 USD) 0.280 CBK discount rate (percent) 2.00 Kuwait export crude price (USD per barrel) 109 Oil production (million barrels per day) 2.98

26.1 64.4 59.3

5.1 38.3 16.1 10.0 7.0 3.1 40.3 51.8 66.5 14.7 -8.5 8.0 -11.0 0.283 2.00 105 2.92

2014

46.3 29.2 23.2

0.5 -2.1 4.8 6.1 3.4 3.2 3.6

7.6 53.9 48.6

5.2 46.3 13.5 -5.9 8.5 3.4 33.4 47.7 64.2 16.6 -11.1

9.6 -12.7 0.284 2.00

95 2.87

positive at 4.4%, additional catalysts might be needed for Boursa Kuwait to capitalize on the momentum from the upgrade. Overall, the market has softened relative to earlier in the year, with October being the third consecutive month of falling prices. Looking forward, we expect to see more price support in December from additional passive inflows from the second tranche of FTSE EM inclusion.

2015 2016 (KD billion) 34.5 33.1 15.7 13.6 23.9 23.9 (percent change) 0.6 2.9 -1.7 3.9 0.4 1.6 8.5 2.9 1.7 3.6 3.7 3.5 3.5 2.6 (percent of GDP) -13.4 -13.9 39.5 39.6 35.0 35.4

4.5 4.3 52.9 53.6

4.0 4.0 -17.3 -17.9 12.4 13.4 4.6 18.9 3.5 -4.6 24.4 17.8 47.5 42.5 23.2 24.7 -17.4 -18.3 11.1 11.7 -14.5 -15.8 0.301 0.302 2.25 2.50

48 39 2.86 2.95

2017

36.3 16.2 24.6

-3.5 -7.2 2.2 3.2

3 1.5 1.3

-9.0 44.1 39.4

4.7 53.1

4.4 -13.4 13.0 19.3

5.9 21.4 46.1 24.7 -19.1 15.9 -12.3 0.303 2.75

51 2.70

Forecast 2018 2019

41.9 21.6 25.5

2.6 2.5 2.8 … … 0.8 1.0

-1.0 47.8 43.3

4.5 48.8 4.8 -5.8 11.5 21.0 15.0 29.2 52.2 23.1 -18.2 14.8 -10.8 … … 69 2.77

43.5 22.1 26.8

4.0 5.0 3.0 … … 2.0 2.3

1.0 46.6 41.3

5.3 45.6 4.7 -3.6 11.7 22.2 14.0 28.8 52.9 24.1 -19.4 15.4 -10.8 … … 67 2.90