Macroeconomic Outlook and Risks
Subdued oil prices and output are weighing on near-term prospects
Growth is expected to strengthen, but lower oil prices and uncertain output cloud the outlook. The mission’s projections are built on oil prices declining from US$62 per barrel in 2019 to about US$56 per barrel in 2023 and remaining broadly unchanged thereafter. The mission has assumed a small increase in oil output in 2020 consistent with the extension of the OPEC+ agreement through the year. Supported by government spending, employment, and credit growth, nonoil GDP could expand by 3 percent in 2020 and accelerate to 3½ percent over the medium term. With oil exports broadly flat and imports rising, the current account surplus would dissipate over the projection horizon. Inflation is expected to increase to 1.8 percent in 2020 as housing rents start to recover.
Credit is expected to accelerate, and further capital inflows are likely. As growth strengthens and capital projects come on stream, credit growth could pick up, supported by ample bank liquidity. The MSCI inclusion in May is expected to bring in about US$3.5 billion inflows (2.3 percent of GDP), of which US$2.6 billion would be passive inflows.
Risks to the outlook are to the downside, mainly from delays in reforms and a sustained drop in oil prices. Delays in fiscal reforms would further amplify fiscal financing needs while slow progress on the structural front would dampen growth. Weaker-than-expected global growth, including due to escalating trade tensions, could drive oil prices lower. If so, the OPEC+ agreement may linger longer than expected, and the oil output recovery projected after 2020 may not materialize. A sustained drop in oil prices would generate unfavorable macro-financial dynamics, with weakening fiscal and current account balances and widening financing needs. Heightened security tensions and a challenging geopolitical environment in the region could weigh on confidence, investment, and growth.
Fiscal and financing challenges would intensify without a course correction
Fiscal measures envisaged by the government in the near-term are modest. Given the challenging context, the government is focusing on measures that are under its control and do not require legislative changes. It has identified a menu of streamlining options, which include: (i) closing loopholes in various social transfer programs, (ii) reprioritizing capital expenditure, and (iii) reducing waste, including by improving procurement. It also plans to raise nonoil revenue by: (i) introducing the long-planned excise on tobacco and sugary drinks, (ii) repricing government services, and (iii) strengthening revenue collection, especially utility payments.
Against this backdrop, the government’s financing needs are projected to grow rapidly. The consolidated fiscal balance would turn from a surplus of 5½ percent of GDP in 2019 to a deficit of a similar magnitude by 2025. After compulsory transfers to the FGF and excluding investment income, this would give rise to average annual financing needs of 20 percent of GDP or, cumulatively, some KD55 billion (US$180 billion) over the next 6 years.
Covering such large financing needs will present a challenge. Under the current arrangement with respect to the FGF and without recourse to other financing sources, GRF’s readily available assets would be exhausted in less than two years. Total KIA assets however would continue to increase. The government is hopeful that parliament will approve the new debt law this fiscal year, which is reflected in mission’s projections. This should pave the way for the government to resume domestic borrowing almost immediately and tap international markets next year. Borrowing would help reduce drawdowns from the GRF allowing it to last longer. Assuming no legal restriction on borrowing, to finance the remaining gap, government debt would have to rise to over 70 percent of GDP in 2025 from 15 percent in 2019. While Kuwait’s very strong credit rating can underpin external borrowing and ample bank liquidity can be tapped through domestic issuance, the borrowing envelope over the medium term would be unprecedented.