Economy undergoes partial recovery from ‘lockdowns’
President of Iraq’s Kurdistan offers condolences
The economy is undergoing a partial recovery from the virus-linked lockdowns, though low oil prices and stubbornly high virus cases are tempering hopes of a stronger rebound. Non-oil growth could reach 3 percent in 2021 then ease slightly amid consolidation measures to reduce the fiscal deficit. We expect the government’s near-term liquidity challenge to be overcome but reform of the public finances has become vital to reduce vulnerabilities and stem the drain on public funds. On the upside, fiscal pressures and sluggish economic growth could trigger a faster pace of reform in the postelection period.
The economy is undergoing a partial recovery from the virus-linked lockdowns and business closures triggered in March. While most of these restrictions had been lifted by mid-August and some economic indicators had rebounded, a combination of stubbornly high virus cases, low oil prices, the fading of temporary policy support measures (particularly debt repayment deferrals) and worries over the government’s deficit-financing abilities are tempering hopes of a strong recovery. After an expected 4 percent drop this year, non-oil GDP is seen rising 3 percent in 2021 and slightly less thereafter as growth conditions normalize and fiscal consolidation measures are pushed through to reduce the deficit. As well as tackling the budget, the new Parliament (elections are scheduled for November or December 2020) is likely to make gradual progress on reforms underpinning the Vision 2035 program to improve the business climate and diversify the economy.
Oil output was cut to a 16-year low of 2.09 million b/d in June due to OPEC policy, but has since edged up and is projected to rise further next year in line with OPEC’s quota schedule. Alongside rising crude output, oil sector GDP (under its broad definition) should get an additional boost in 2021-23 from extra output of refined products as the Clean Fuels and Al Zour refinery projects come o nstream, which once complete will see refining capacity almost double. State oil company Kuwait Petroleum Company also faces austerity measures, seeking cuts of 25 percent or KD 7 billion to its five-year capital spending budget. However these cuts will not be an impediment to a recovery in oil output given the spare capacity created by recent cuts. Oil GDP could rise 1 percent in 2021 then average 6-7 percent in 2022-23, pushing total GDP growth from 2 percent in 2021 to nearly 5 percent in 2022 and 2023.
Deficit financing
The challenge of addressing the fiscal deficit has become more acute following the drop in oil prices since March. The deficit is seen rising to 33 percent of GDP in FY20/21, from 9.5 percent of GDP last year, before narrowing to 10 percent of GDP by FY23/24 assuming that spending is trimmed by around 10 percent and that oil prices stabilize at around $55/bbl. Our assumption is that the bulk of the non-oil fiscal adjustment comes from spending cuts in the near term (5 percent per year this year and next) – especially fuel costs and capital spending. Further out, some new revenue-raising measures are expected of which excise duties (assumed in 2021) and VAT (2022) are most likely. But a more comprehensive approach to fiscal sustainability is desirable including a medium-term framework for spending, requiring a political consensus that has been tough-to-achieve so far.
Financing the deficit has become an urgent issue given the steady depletion of the General Reserve Fund (GRF), the inaccessibility of the much larger Future Generations Fund and the prohibition on issuing new debt since 2017, pending parliamentary approval. Assuming that a debt law is approved soon and given the slowly improving deficit projection, net issuance of KD 3 billion per year from next year would push public debt up to 31 percent of GDP by FY23/24 which is still low by international standards, and sustain the GRF at much-reduced levels. This would provide a path to longer-term sustainability, providing that serious reforms were forthcoming. Meanwhile, the external current account outlook is more robust, despite a slip into deficit this year for only the second time on record.
Inflation
Inflation remains low but has been pushed up moderately by the COVID-19 pandemic due in particular to rising food prices but also stronger ‘core’ pressures, perhaps linked to supply chain issues and a post-lockdown bounce in consumer spending. We expect these factors to ease off a little next year, softening average inflation to 1.5 percent from 1.8 percent in 2020 despite recovering economic growth. Weaker housing rents are a downside risk to the outlook, while the possible implementation of VAT in 2022 would temporarily push inflation up. Meanwhile, credit growth stood at 4.6 percent y/y in July and has held up well given the severe disruptions to activity, supported by emergency credit lines and the debt repayment holiday. The policy discount rate was cut by 1.25 percent, to 1.5 percent in March and could be on hold through the forecast period given recent dovish signals from the US Fed and no change in the foreign exchange regime.
Fiscal deficit
We expect the government’s near-term liquidity challenge to be overcome but nevertheless reform of the public finances has become vital to reduce vulnerabilities and stem the drain on public funds. The slow pace of economic reform and job creation are also concerns, as is the impact on business and competitiveness of labor market developments. On the upside, fiscal pressures and sluggish economic growth could trigger a faster pace of reform in the post-election period.
KUWAIT CITY, Oct 13, (KUNA): His Highness the Amir Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah received Tuesday at Bayan Palace, His Highness Sheikh Nasser Al-Mohammad Al-Ahmad Al-Sabah.
His Highness the Amir also received President of Iraq’s Kurdistan Region Nechirvan Idris Barzani who offered his condolences on the demise of the late Amir His Highness Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah.
Barzani during the meeting also congratulated His Highness the Amir on assumption of office.
His Highness also met with President of Kuwait Chamber of Commerce and Industry Mohammad Jassem Al-Sager and Chamber members.
His Highness during the meeting affirmed the importance of the private sector’s role in strengthening the national economy and contributing to diversifying sources of income, and the importance of cooperation with the concerned agencies to achieve the desired development goals.
For his part, Chamber President Al-Sager said, on behalf of Chamber members, it was their honor to be meeting with His Highness the Amir Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah, congratulating him on office. He said his rule was a continuation of His Highness late Amir march in serving Kuwait and its people.
The Chamber also congratulated naming His Highness Sheikh Mishal Al-Ahmad Al-Jaber Al-Sabah as his Crown Prince, and praising the smooth government transition, Al-Sager added.
Al-Sager in his speech assured to His Highness the Chamber professional and technical record, and commitment to objectivity and the public interest and its role in supporting the government.
Furthermore, His Highness the Amir also received Chairman of Kuwait Red Crescent Society (KRCS) Hilal Al-Sayer and Secretary General of KRCS Maha Al-Barjas, as they viewed the association’s latest projects and achievements.
Sectors
His Highness the Amir praised KRCS role in facing the repercussions of COVID-19 in cooperation with various sectors of the country, wishing them continued success.
The meetings were also attended by Minister of Amiri Diwan Affairs Sheikh Ali Jarrah Al-Sabah, chief of the Amiri Diwan Sheikh Mubarak Faisal Al-Sabah, Deputy Minister of Amiri Diwan Affairs Sheikh Mohammad Al-Abdullah Al-Sabah, Amiri Diwan Undersecretary and Director of His Highness the Amir’s Office Ahmad Al-Fahad and head of Amiri Protocols Sheikh Khaled Al-Abdullah Al-Sabah.
Meanwhile, His Highness the Amir received a condolences letter on Tuesday from Queen Margrethe II of Denmark over the passing of His Highness the late Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah.
The Queen extended her heartfelt commiserations to His Highness the Amir and the Kuwaiti people, recalling the late Amir’s efforts to boost global peace and security.
In response, His Highness the Amir sent a message highlighting his gratitude and appreciation for the warm sentiments.
Also, His Highness the Amir received a condolences letter on Tuesday from President of the European Commission Ursula Von Der Leyen and President of the European Council Charles Michel over the passing of His Highness the late Amir.
Support
The presidents extended their heartfelt commiserations to His Highness the Amir and the Kuwaiti people, praising the late Amir’s tireless efforts to enhance dialogue for the settlement of disputes and his support of humanitarianism.
In response, His Highness the Amir sent a message highlighting his gratitude and appreciation for the warm sentiments.
His Highness the Amir also received a condolence letter on Tuesday from Cameroon’s President Paul Biya over the passing of His Highness the late Amir.
The president extended his heartfelt commiserations to His Highness the Amir and the Kuwaiti people, recalling the late Amir’s service to his nation and his efforts to boost cooperation amongst Arab states.
In response, His Highness the Amir sent a message highlighting his gratitude and appreciation for the warm sentiments.
In the meantime, His Highness the Amir Sheikh Nawaf received a condolences letter on Tuesday from Niger President Mahamadou Issoufou over the passing of His Highness the late Amir.
The president extended his heartfelt commiserations to His Highness the Amir and the Kuwaiti people, praising the late Amir’s contributions to boost security and stability in the Middle East.
In response, His Highness the Amir sent a message highlighting his gratitude and appreciation for the warm sentiments.