Kuwait's banking sector safe and sound, says IMF

Kuwait is facing "lower-for-longer" oil prices from a position of strength, owing to large financial buffers, low debt, and a sound financial sector. Nonetheless, lower oil prices have weakened fiscal and external positions and generated large fiscal financing needs.

As the government adjusts to the new oil price reality, the need for a vibrant private sector employing more Kuwaiti nationals has heightened. Against this backdrop, the authorities have laid out a comprehensive reform strategy and have already taken wel- come steps to curtail spending and foster an environment more conducive to private investment.

The key challenge is to build on this strategy to accelerate reforms that underpin fiscal consolidation and ensure that future generations can continue to enjoy a high living standard, while creating incentives for private initiative and investment. The mission supports a broad fiscal reform package that aims at tackling current spending rigidities-particularly wage bill, subsidies and transfers, while diversifying revenues, increasing capital outlays, and enhancing spending efficiency.

Better aligning public sector com- pensation with that in the private sector, accelerating privatization and public-private partnerships, and further improving the business climate is key to creating private sector jobs for nationals and promoting diversification.

The IMF team highly values the candid discussions with the Kuwaiti authorities and expresses its gratitude for their hospitality and excellent cooperation. Non-oil growth has picked up modestly over the past two years, and inflation has moderated. After coming to a standstill in 2015, real non-hydrocarbon GDP growth has recovered and is set to reach 2½ percent this year, driven by improved confidence. However, a cut in hydrocarbon output by close to 6 percent, reflecting implementation of the OPEC+ deal, will bring overall real GDP down by about 2½ percent in 2017.

Notwithstanding the impact of higher energy and water prices, inflation is on track to reach a multiyear low of 1¾ percent in 2017, due to a decline in housing rents and favorable food price developments. The external current account recorded its first deficit (4½ percent of GDP) in many years in 2016, driven by the further decline in oil prices, but is set to improve to a broadly balanced position this year as oil prices recover.

The government's underlying fiscal position has improved on the back of spending restraint, but financing needs have remained large. The underlying (non-oil) fiscal position improved last year, reflecting further efforts to curtail current expenditure. Combined with the impact of lower oil prices on energy subsidies (some KD 2 billion), these efforts reduced current spending by KD 3¼ billion over the past two years.

While overall fiscal accounts remained broadly balanced in 2016/17, the fiscal balance which excludes the mandatory transfers to the Future Generations Fund (FGF) and investment income posted a large deficit (17½ percent of GDP) for a second year in a row.

The corresponding financing needs were covered through a drawdown in General Reserve Fund (GRF) assets, domestic borrowing, and a successful debut international sovereign bond sale.

The banking sector has remained sound, and credit growth has slowed mildly. As of Q2 2017, banks featured high capitalization (CAR of 18.3 percent), steady profitability (ROA of 1.1 percent), low non-performing loans (ratio of 2.4 percent), and high loan-loss provisioning (over 200 percent coverage). Private sector deposit growth has declined in recent years, but this has partly been offset by an increase in public sector deposits, and some banks have also raised funding in international markets.