Non-oil growth steady at 5% despite cheap oil

economic growth is set to maintain a healthy pace despite last year’s collapse in oil prices. Growth, which picked up since 2013, is being supported by the accelerated implementation of the government’s development plan and a robust consumer sector. Ambitious capital spending targets have boosted aggregate investment and should continue to do so in 2015 and 2016.

The parliament’s recent approval of the five-year development plan for 20152020 as well as the FY15/16 capital spending budget confirm the commitment to the ambitious investment spending targets. We think the capital spending outlook will remain unchanged in the current low oil price environment.

While lower oil prices have had a significant impact on Kuwait’s fiscal and external positions, the country continues to enjoy substantial buffers that allow it to stay the course in the medium term. Indeed, Kuwait is expected to register a deficit in FY15/16, its first in over a decade. However, asovereign wealth fund estimated at over 300% of GDP ($550 billion),among the highest in the region, will allow Kuwait to easily finance a deficit without having to make deep cuts in spending.

Still, lower oil prices have highlighted the longer term sustainability challenges for Kuwait. As such, the government has rekindled efforts to introduce vital fiscal reform.

Those include a broader corporate income tax and a value added tax (VAT), though neither is likely before 2019. A new subsidy reform initiative is also expected, which could include a cash transfer to lower income households.

The parliament is also currently delib-