Oil prices rebound in Jan; draft budget signals fiscal expansion

Global markets rally as US-China trade tensions ease

KUWAIT: After December’s volatility, global financial markets recovered in January helped by a dovish policy shift by the US Fed and amid hopes for easing tensions on the US-China trade war. The news benefitted both oil prices and the Kuwaiti stock market, the latter rising 2.5 percent for its best month since July. There was also positive news on the domestic macroeconomic front, with employment growth and real estate activity both coming strong at the end of last year. This seems to support the case that underlying growth may be gradually improving. There were important signals on fiscal policy, too. The draft budget for the coming year points to an expansionary fiscal policy which should bode well for the near-term growth outlook, albeit at the expense of a larger fiscal deficit and a possible drawdown in the government’s financial reserves.

Crude output falls

The price of Kuwait Export Crude bounced by 17 percent in January to finish the month at $61/bbl, more than recouping the losses seen in December. The rally was helped by news that OPEC+ was making progress in implementing its 1.2 million b/d production cut aimed at clearing the global oil glut. While official figures are not yet available, survey data point to a drop in OPEC output of 1 million b/d in January. Saudi Arabia is said to have cut by 0.4 million b/d, deeper than targeted. In compliance with the OPEC+ decision, Kuwait is targeting a reduction of 85,000 b/d to 2.72 million b/d, which would leave crude output down around 1 percent on average this year, from a 1.4 percent rise in 2018.

The government has presented the draft budget for FY2019/20 to parliament for approval. It signals a looser fiscal stance, with spending rising 4.7 percent y/y in budget-on-budget terms to KD 22.5 billion. Within the total, capital spending is seen rising 0.8 percent y/y to KD 3.3 billion, while current spending rises 5.3 percent to KD 19.2 billion. The rise in current spending includes a 7 percent rise in wages & salaries, and an 11 percent rise in spending on goods & services. The latter mostly reflects larger subsidy payments for power stations due to a higher oil price assumption ($55/bbl versus $50/bbl before). With revenues projected to rise 8.6 percent to KD 16.4 billion, this leaves a deficit of KD6.1 billion before transfers to the Reserve Fund for Future Generations (KD 7.8 billion after). Note that the government’s forecasts are typically conservative, and the eventual budget position is likely to end up stronger than projected.

While spending usually comes in below budget, the planned increase, if implemented in full, would provide significant support for economic growth over the coming year. However, in the absence of economic reform measures on both revenues and expenditures, and notwithstanding the government’s large financial reserves, rising current spending reduces the government’s ability to react to future oil shocks. Provisional public finance data for the first nine months of FY2018/19 (to December) suggest that the fiscal outcome may come in better than budgeted. A surplus of KD 3.6 billion was recorded yearto-date, as spending came in soft but also as rising oil prices boosted revenues. Year-to-date spending fell 3.3 percent y/y, with capital spending down 0.4 percent. The execution rate for capex fell to 45 percent of the full-year total, down from 52 percent at the same stage last year. Spending rates normally accelerate in the final three months of the year however, but we still expect a small deficit for the year as a whole.

Employment growth According the official biannual data release, employment saw an encouraging pick-up through 2018. Total employment rose 4.2 percent y/y in December - driven by increases in both Kuwaiti employment (+3.7 percent y/y, a multi-year high) and expat employment (+4.3 percent y/y) - up from growth of 2.4 percent in December 2017. Kuwaiti employment continues to be predominantly driven by public sector hiring, which was up 4.0 percent y/y, while expat jobs growth mainly stemmed from hiring in the construction, real estate and hospitality sectors.

Meanwhile, population growth rose to 2.7 percent y/y from 2.0 percent in 2017. Expat population growth reached 2.8 percent, amid a decline in the number of expatriate dependents.

Real estate sales

The real estate market ended 2018 on a very strong note. December saw sales of KD470 million, the second highest monthly sales of 2018 and far exceeding the monthly average of the year. The surge was driven by much higher activity in all three sub-sectors, but most notably the commercial sector which saw sales spike to a two-year high of KD 127 million on stronger volumes. This sector may have benefitted from a surge in the number of commercial business licenses (start-ups) issued during 2018, encouraged by the ongoing easing of requirements and procedures by MOCI. Apartment sales meanwhile surged to their second highest in four-anda-half years.

The strong sales figures for December were accompanied by positive price changes in both the residential and investment sectors. Monthly price movements have been mostly positive since September, showing a consistent but mild uptrend, and year-on-year changes in all sectors were positive as of the year’s end. In total, 2018 sales were KD3.4 billion, up 54 percent from 2017, and the highest since the surge in 2014.

Consumer spending rises According to the NBK consumer index, consumer spending growth slowed slightly to 0.7 percent m/m in January from 0.9 percent m/m in December, as increases in both durables (0.8 percent) and services (1.2 percent) spending were offset by a decline in non-durable expenditures (-0.9 percent m/m) for the sixth straight month. On a year-on-year basis, consumer spending remained in decline at -1.7 percent, a slower pace of contraction than December’s -1.9 percent. Nonetheless, the outlook for spending remains fairly encouraging given solid consumer confidence, low inflation and stronger employment growth.

Inflation picked up in December to 0.4 percent y/y from a 15-year low of 0.1 percent in November. The pickup came mostly from slower deflation in some of the major index subcomponents: food deflation slowed to -0.1 percent from -0.4 percent in November, while housing deflation eased to -1.1 percent from -1.4 percent in November. But our measure of core inflation, which excludes food and housing, also rose, to 1.7 percent from 1.3 percent in November. Items including furnishings & household maintenance, transportation, communication, education, and clothing & footwear, together weighing in at 35 percent of the CPI basket, all saw modestly higher inflation during December. We expect a slight rise in inflation overall this year to an average of 2.0 percent from 0.6 percent in 2018.

Credit growth reaches 13-month high Credit growth rebounded to a 13-month high of 4.3 percent y/y in December from 3.0 percent in November, supported by stronger lending to both businesses and households as well as the usual end-of-year jump in lending for the purchase of securities. Lending to businesses rose 5.3 percent y/y, up from 3.3 percent in November, driven mainly by a significant improvement in real estate borrowing. Household borrowing rose 6.0 percent from 5.8 percent the previous month. Growth in housing loans remains the key driver (6.8 percent y/y), while growth in consumer loans (although up m/m) remained in decline.

Meanwhile growth in deposits edged up to 3.2 percent from 2.9 percent before, due to a strong rise in government deposits after five consecutive months of decline. The M2 money supply measure increased by 4.0 percent y/y versus 4.4 percent in November.

Equity market

Boursa Kuwait (BK) made a solid start to the year in January, with the All-Share index rising 2.5 percent m/m. In contrast the MSCIGCC rose 7.5 percent, lifted by a surge in Saudi’s TASI. BK turnover was strong at a daily average of 180 million shares, the highest since April 2017. Market capitalization breached the KD30 billion mark for the first time since 2014. The rally was led by financial and banking stocks, which rose by 5.6 percent and 4.1 percent m/m, respectively. Financial and banking stocks were boosted by good earnings and the removal of foreign ownership limits in the banking sector (subject to CBK approval). Net foreign inflows, although moderating from the record high of December, remained solid at KD48 million, roughly double the average monthly net inflow of 2018.