Oil prices edge lower in Q3; Kuwait moves up competitiveness ranking
Project awards soar to KD 330 million in Q3 2019
KUWAIT: The past quarter has seen rising pessimism about the global growth outlook, in particular driven by the unresolved US-China trade war, which culminated in the IMF revising down its forecast for global growth this year to a post-financial crisis low of 3.0 percent. The direct impact on Kuwait has so far been mostly felt through the price of oil, which fell in 3Q19, although remains volatile. Lower-than-expected oil production and a downward revision to our oil price forecast led us reduce our 2019-20 growth forecasts. Growth concerns also saw key central banks pivot towards policy loosening, but rates in Kuwait were left on hold as the central bank looked to balance supporting growth with maintaining the attractiveness of the dinar.
Oil prices fall in Q3
Oil prices saw a volatile quarter, with initial weakness on a combination of trade war and oversupply concerns pushing the price of Kuwait Export Crude (KEC) down to $58/bbl in mid-August. This gave way to a spike above $68 in mid-September after the drone attacks on Saudi oil infrastructure. Prices had subsequently fallen back to around $60 in early October on the rapid restoration of Saudi output and also a refocus on global growth concerns, including slow growth in China. On average, prices were 8 percent lower in 3Q19 than in Q2.
Meanwhile the OPEC+ group continues to over-comply with output cuts aimed at supporting prices, and which are due to be reviewed by end-March 2020. This is only partly the result of the temporary drop in Saudi output in September. Kuwait’s crude production stood at 2.66 million b/d in September, leaving it 175 percent compliant with its share of targeted cuts (of 85,000 b/d), and more so than earlier in the year. In our baseline projections, we assume that Kuwait’s oil output edges up only gradually next year, returning to 2.71 million b/d in 2H20 and back in line with quota targets which by then have already been extended amid continued concerns over demand weakness and a slowing global economy. The price of Brent crude averages $60/bbl next year ($58 for KEC) from $64 (KEC $63) in 2019.
Lower oil production
This soft oil production climate has a bearing on our broader economic growth forecasts. We now expect oil sector GDP growth of -2.5 percent in 2019, a larger fall than the 0.5 percent decline projected before. Next year oil GDP is projected to grow 2.0 percent, potentially given a small lift by rising gas and refined oil output - the latter the result of the coming onstream of the new AlZour refinery. Meanwhile, provisional quarterly data shows non-oil growth averaged 0.8 percent y/y in 1H19. This data is subject to heavy revision but if unchanged would make our forecast for non-oil growth of 2.5 percent in 2019 as a whole difficult to achieve. Underlying the moderate growth outlook is a combination of expansionary fiscal policy, a strong consumer sector supported by solid employment growth, but also softer oil prices and the sluggish performance of investment including project awards. A continuation of these trends as well as cooling world growth has led us to downgrade our nonoil growth forecast for next year to 2.5 percent from 2.75 percent before. These changes generate overall GDP growth of 0 percent this year and 2.3 percent in 2020.
‘Competitiveness’ rankings
While the near-term growth outlook remains modest, there was some better news on structural reforms with the latest release of two influential global reports on business conditions. Kuwait jumped eight places to 46 (out of 141 countries) in the competitiveness rankings compiled by the World Economic Forum, thanks to significant improvements in sub-categories of ICT adoption, health, product and labor markets. The move sees Kuwait surpass Oman and stand just behind Bahrain in the GCC rankings. Kuwait ranked joint first in the world for ‘macro stability’ thanks to low inflation and good debt dynamics.
Meanwhile, the World Bank named Kuwait among the top 20 ‘improvers’ in the soon-to-be-released annual Doing Business report, reflecting reforms in areas including starting a business, getting electricity and trading across borders. The developments provide a welcome boost to the investment climate and signify some progress towards the Vision 2035 development aims.
Fiscal surplus
The government recorded a small surplus of KD 0.2 billion, equivalent to around 1 percent of GDP, in the first five months of FY2019/20 (to August). After transfers to the Reserve Fund for Future Generations, it translates into a deficit of KD 0.5 billion. The small headline surplus came despite a 13 percent y/y fall in revenues to KD 7.4 billion - mostly oil revenues - amid a drop in both oil prices and oil production over the same period. Spending, by contrast, rose by a very robust 21 percent to KD 7.1 billion, pushed up by a 25 percent rise in current spending including wages, subsidies and transfers to the social security fund.
These provisional figures however are at best a loose guide to what will happen over the full year, due to both uncertainty over oil prices and the tendency for spending to accelerate strongly in later months. Moreover, spending growth in FY19/20 so far may be being skewed upwards by an unusually weak start to last year, which was subsequently made up at year-end. The outlook is further complicated by the potential for additional government arrears payments, which added a reported KD 1.8 billion to spending last year and are likely to be repeated this fiscal year.
Based upon our assumptions, which include a KEC oil price of $62/bbl for the fiscal year as a whole, and spending maintained at an elevated level due to further arrears payments, we expect the deficit to end up at around 8 percent of GDP in FY19/20, from a deficit of 3.1 percent last year. This translates into a post-transfers deficit of around KD 5 billion or nearly 13 percent of GDP, which will be financed from the General Reserves Fund in the absence of a new debt law. These figures exclude returns on the government’s investments abroad, worth more than 10 percent of GDP per year.
Project awards edge up According to MEED, project awards edged up to KD 330 million in 3Q19 from KD 270 million in Q2, mostly stemming from the power and water (KD 200 million) sectors. Awards so far this year have totaled KD 770 million, short of expectations, with major projects being repeatedly shifted into future quarters. Some KD 1.5 billion - including the Kabd Solid Waste Project (KD 264 million) - is provisionally scheduled for 4Q19. But based upon trends in previous quarters, we conservatively expect around KD 2 billion in awards this year, a modest improvement over 2018’s KD 1.7 billion, given further potential rollovers and delays.
For next year, large awards are expected in the power, chemical and construction sectors. Major planned projects include the Dibdibah Solar Power Plant (KD 360 million) and the Khiran Power & Desalination Plant (KD 225 million) planned for 1Q20 and 2Q20 respectively. Further, the much-anticipated KD 3 billion Al-Zour petrochemical complex will expectedly be tendered 4Q20. MEED’s total planned project estimate for 2020 currently stands above KD 6 billion, though we believe this figure to be optimistic and unlikely to materialize.
Real estate sales strong in 3Q19
Real estate sales rebounded in September to a solid KD 307 million, up 53 percent y/y and more than double the sales recorded in August, which suffered from seasonal weakness. Stronger sales were driven by the residential and investment sectors, where transactions rose 85 percent and 75 percent m/m respectively. Looking back at the third quarter overall, sales totaled a solid KD 825 million, down slightly from the same quarter last year (KD 832 million) despite a rise in transaction volumes, likely due to lower investment sector prices.
Meanwhile trends in prices are mixed. Residential sector prices were stable in August and maintained strong yearly gains (19 percent land, 9 percent homes), while investment sector prices reverted to negative year-on year territory (-3 percent for buildings, -1 percent for apartments), despite a solid 7 percent rise in the apartment sub-sector in the three months to August. Investment building prices however have been on a clear downtrend, down 10 percent since May, possibly a lagged reaction to the same market pressures that previously weighed down on apartment prices, namely oversupply, persisting vacancies and declining rents.
Employment growth According to the latest biannual release of demographic data, Kuwait’s population rose 2.1 percent y/y in June 2019 to 4.7 million. The growth rate was lower than the 2.7 percent seen in 2018, mainly due to a decrease in expat growth to 2.1 percent in June versus 2.8 percent in 2018. Meanwhile, growth in the population of Kuwaiti nationals was broadly steady at 2.3 percent in June versus 2.4 percent in 2018, holding at 1.4 million.
Growth in total employment eased from 4.2 percent y/y in 2018 to 3.7 percent in June 2019, far below the rates seen in 2015-16. (Chart 5.) The decline was mainly on the back of continued declines in expat numbers in the public sector (-3.1 percent), driven by Kuwaitization efforts. While Kuwaiti jobs growth held at a firm 3.5 percent, expat employment growth slowed from 4.3 percent to 3.7 percent. Private jobs growth among expats also weakened slightly from 4.6 percent in 2018 to 4.1 percent. After factoring out domestic workers, the June 2019 figure is even softer at 2.7 percent y/y versus 5.1 percent in December. Softer private sector expat jobs growth was led by slower hiring in the construction sector.
Inflation hits 22-month high Consumer price inflation reached a 22-month high of 1.7 percent y/y in September, from 1.2 percent in August, with rates having risen gradually since April. The rise was broad-based driven mostly by a sizeable pick-up in food (1.8 percent versus 1.1 percent in August), furnishings/household maintenance (3.3 percent from 2.6 percent), clothing and footwear (2.3 percent vs 1.7 percent) inflation, which together comprise a hefty 36 percent of the CPI basket. Meanwhile, housing rent inflation was unchanged at -0.8 percent. Core inflation (which excludes food and housing) rose sharply to 3.3 percent from 2.8 percent in August, consistent with good consumer loan growth and employment conditions.
Average inflation currently stands at 0.9 percent y/y so far this year, on track to reach our year-average forecast of 1.0 percent (with an end-year figure of around 1.5 percent). Next year, we expect inflation to edge up but remain low at around 1.5 percent, with housing rents more stable but still weighing on the headline rate. Although core inflation has risen recently, a sustained spell of much greater underlying price pressure still seems unlikely: economic growth rates are modest, credit growth moderate, the dinar is stable at a relatively strong level, and prices at the wholesale level show few
CBK leaves rates on hold
After an increase of 4.8 percent y/y in 2Q19, domestic credit growth had edged down to 4.6 percent in August, but remained higher than July’s reading of 4.2 percent. This slight slowdown was driven by a deceleration in lending to both businesses and households. Business credit grew 4.6 percent in August, while household credit (excluding securities lending) growth stood at 5.3 percent amid softer growth in housing loans. But growth in personal consumption loans (i.e. non-housing) - worth less than 10 percent of all household loans recorded a very robust 31 percent in August, still benefiting from the impact of the Central Bank of Kuwait’s (CBK) loosening of lending restrictions late last year. Overall credit growth should end 2019 still in the 4-5 percent range, supported by the stable macro climate, a slight pick-up in project awards and further solid employment growth.
Meanwhile, total deposit growth slowed from 1.2 percent y/y in July to 0.8 percent in August. This reflected a drop in private deposits by 0.5 percent, while government deposit growth accelerated to 8.3 percent. The CBK kept the discount rate unchanged at a level of 3.0 percent in September despite a 25 bps rate cut by the US Federal Reserve - as it did following the Fed’s previous rate cut in July. This decision reflects the degree of policy flexibility provided by the dinar’s peg to a basket of currencies rather than the US dollar alone, as well as a desire to reinforce the attractiveness of dinar-denominated assets.
Equity market loses steam
Kuwait equity price performance lost momentum in 3Q19, despite reaching peak year-to-date gains of 21 percent in the All-share index in early August. The subsequent escalation of trade and geopolitical tensions and volatile oil prices likely weighed on sentiment, leading to profit-taking and reduced net foreign inflows in August and September compared to earlier in the year. Quarteron-quarter, the All-Share index was down 2.6 percent. Market capitalization also declined, to KD 33 billion as of the end of September from a peak of KD 35 billion in August. The S&P-Dow Jones EM index inclusion on September 23rd lent some support in the last week of the month, partly offsetting previous losses. Year-todate gains (as of October 15th) however remain solid, at 13 percent, outperforming the MSCI-GCC by far (-2.4 percent). Market liquidity was solid in September, with an average daily turnover of KD 35 million, above the monthly average this year.
Looking forward, the market is expected to remain liquid and fairly stable in the near-to-medium term, supported by improved sentiment after the recent dip, two large upcoming IPOs in Q4 (Boursa Kuwait and North Al-Zour IWPP) and large expected passive and active inflows from the MSCI EM inclusion scheduled for May 2020. But downside risk is also present in the form of geopolitical and trade tensions, oil price volatility and sluggish global growth.