Oil output seen rising on OPEC policy shift

Kuwait to benefit if OPEC+ target is lifted

KUWAIT: Although oil prices have eased back a touch over the past few weeks, we have revised up our forecast for economic growth this year on fresh assumptions about oil production in light of an expected change in output targets by the OPEC+ group in June. Weak credit data for May, however, suggest that non-oil growth is struggling to gain momentum, although some of this may be related to seasonal factors and we still look for a mild pick up in 2H18 once the new expansionary budget begins to take effect. It appears that parliament is softening its opposition to the new debt law and is linking it to budget reforms.

The law would allow the government to borrow up to KD 25 billion from KD 10 billion previously and extend debt maturities to 30 years. However opposition to the law remains substantial.

Kuwait to benefit

Having seen a big rally in previous months, crude oil prices fell back in late May and early June. The price of Kuwait Export Crude declined from a peak of nearly $76/bbl in mid-May to $72 towards the end of the month, following similar trends in the global benchmark, Brent. The initial fall reflected the view that crude may have risen too far, too fast, but more fundamentally on news that the OPEC+ group - whose supply restraint has been central to price strength - would raise production by up to 1 million b/d when it meets on 22nd June. Prices have since edged up again, with KEC at $74 in mid-June. Although the meeting could well be a fractious one with strong opposition from other OPEC members to any increase in output (Iran, Iraq), we think that some easing of supply restraint in H218 is likely to be adopted by the group driven mainly by Saudi Arabia (which already increased its output last month), to offset some of the 0.5 million b/d plunge in output in Venezuela over the past year and possibly future sanctions-driven losses in Iran.

Kuwait’s oil sector is likely to benefit from any relaxation in production targets. It has stuck faithfully to its share of output cuts initially announced in 2016, reducing production by nearly 5 percent to just over 2.7 million b/d at present. If the group’s output rises by 1 million b/d and Kuwait’s share of this is similar to its share of the original cut, it would imply Kuwaiti production rising by 80,000 b/d or 3 percent to nearly 2.8 million b/d.

We have altered our oil production and GDP forecasts to reflect this change in assumptions. Previously we had expected the deal to unwind at the end of the year. If it is brought forward to July, then some of the production increase we expected for 2019 will fall this year instead. Oil sector GDP is therefore now seen rising 1.5 percent this year and the same in 2019, versus 0 percent and 1.5 percent, respectively, before. This will lift overall GDP growth to 2.5 percent this year from 1.8 percent previously.

Real estate sales dip

Real estate sales declined by 15.1 percent m/m in April to reach KD 300 million compared to KD 353 million in March. However, sales levels are still high relative to the 2017 and 2018 monthly averages of KD181 million and KD277 million, respectively. The monthly decline was partly due to the base effect of stronger sales in March, which were the highest since December 2014. The number of transactions, on the other hand, increased by 19 percent m/m to 679 from 575 in March. Investment sector sales remained particularly strong in April, whereas commercial sales fell back after a bumper March.

Year-to-date, average monthly sales and transactions in 2018 have been higher than the monthly averages for 2017, suggesting that 2018 may be a more active year for real estate if current trends continue. Prices appeared to stabilize in April, posting slightly positive m/m changes across the various sectors, with the exception of the investment apartment subsector, where prices continued to decline. The stabilization in prices might be explained by a rise in demand due to the large price falls seen in 2017 and 1Q 2018 as a result of the market-wide oversupply.

Credit growth slows

Credit growth slowed to just 1.5 percent y/y in April, its lowest rate since 2011, but private sector deposit growth was strong. Credit contracted by KD 166 million m/m, driven by the usual start-of-quarter decline in lending for the purchase of securities and a decline in business credit, following two months of solid growth in that sector. Household lending remained resilient, however, supported by a pickup in installment loans, usually used for the purchase of homes.

Meanwhile, private deposits were boosted by corporate dividend payments - which were paid a month later than usual - pushing the money supply up 4 percent y/y to its strongest pace in 17 months. Credit growth is expected to pick up in the coming weeks on financing of some major oil development projects as part of KPC’s plan to raise oil production capacity to 4 mb/d by 2025.

Recent strength in oil prices has led to an improvement in the external trade position. The merchandise trade surplus widened in 1Q18 to KD2.3 billion - an estimated 23 percent of GDP - from KD1.9 billion in 4Q17. The pick up mostly reflects a 5 percent rise in oil revenues to KD4.4 billion led by higher prices for Kuwait Export Crude which rose 8 percent q/q to an average of $63/bbl. Oil revenues account for nearly 90 percent of all merchandise exports.

But imports also contributed, falling 3 percent q/q to KD2.6 billion. Import growth was strong last year, reaching a five-year high of 10 percent for 2017 in a sign that demand in the economy was strengthening. Annual import growth remained positive in 1Q18 at 3 percent y/y, but down from 12 percent in 4Q17. One of the reasons for last year’s strength was unusual growth in capital goods imports, which reached 20 percent but slipped to just 1 percent y/y in 1Q18. Consumer-oriented imports were also soft at 4 percent y/y, affected by weakness in car imports; autos account for 9 percent of all goods imports.

Stock market sees mild rally

Boursa Kuwait’s All Share index ended May in the red, though subsequently regained most of its losses on improved global sentiment and oil prices, as well as regional dynamics. However, the stock market is still underperforming, with its current retreat over 2Q18 (-4.2 percent quarter-to-date) more than offsetting the rally it experienced the previous quarter. The index is down 0.9 percent year-to-date.

Average daily trading activity in the first five months of the year dropped by half compared to its average in 2017, dropping to KD 11.5 million per day. Kuwaiti investors were net sellers during that period, taking advantage of foreign investor buying ahead of the FTSE upgrade. This pushed the 3-month average share of foreign activity in the bourse to a record 22 percent.

June also saw the private placement of crane operator Integrated Holding Company, which raised more than KD 130 million and was more than twice oversubscribed, reflecting the pent-up demand for investing opportunities in Kuwait. With more than 1000 shareholders, the firm is eligible to list on the premier market, which may further support domestic activity.

The lull of the summer months will see trading remain somewhat subdued, but it is expected to pick up around September when the inclusion of Boursa Kuwait into FTSE Russel’s Emerging Market index starts to be phased in. The bourse recently adopted FTSE Russell’s industry classification benchmark, hoping to bring the market closer in line with international standards, all while facilitating foreign buying.

CBK leaves interest rates on hold

Dinar steady versus dollar

The Kuwaiti dinar was steady in the month to mid-June, almost unchanged versus the US dollar at $3.31/KD1, though up slightly against the euro and the pound. The moves reflect the recent strengthening of the dollar against other currencies on the back of political ructions in Europe, strong US economic data and the prospect of rises in policy interest rates by the Federal Reserve. As expected, the Fed hiked interest rates by a further 25 bps in mid-June, moving the target range to 1.75-2.00 percent. Unlike other currencies in the region which have pegs to the US dollar, the Kuwaiti dinar is pegged to a basket of currencies dominated by the US dollar, and the central bank (CBK) chose not to raise its policy rate in June so as not to harm non-oil economic growth. The CBK indicated that it will use other monetary policy instruments to keep interest rate differentials to maintain the attractiveness of the dinar, and that banks have the capacity to raise their deposit rates while keeping the cap on their lending rates. The CBK then raised its repo rates by 25 bps and now banks raised their deposit rates by the same amount.