Global Investment House
Kuwait Economy

Kuwait's GDP is estimated to have grown 5.1% to USD173.4bn in 2012, lower than 6.3% in 2011. This growth has been primarily due to the continued increase in oil output, resurgence in the non-oil sector, and improved public and private consumption levels. However, the political instability halted many developmental projects, thus putting an adverse impact on the economic growth. The oil sector is expected to grow 8.5% in 2012, after a record performance (14.2% growth) in 2011. Private consumption is estimated to expand twice as fast (5.0%) versus the last year, boosted by high income levels and strong demand for imported goods. Growth in non-oil sector is projected to increase 5.5% in 2012, a major rebound from a mere 0.9% growth in 2011.

Going forward, the pace of economic activity will be largely determined by the speedy implementation of the four-year Kuwait Development Plan with projects worth more than half the size of the current nominal GDP. GDP growth is likely to be modest (1.1%) in 2013 as oil prices and production stabilizes, exports remain subdued, and government expenditure slows down. Nevertheless, capital formation is expected to rise 6.1% in 2013, and continue to increase till 2017. Non-oil sector would continue its current growth trajectory, whereas private consumption is projected to grow 4.9% in 2013, accountable to wage growth and continuing demand for imports.

A young population and growing labor force create demand for public sector jobs

Kuwaiti population, which grew at a CAGR of 3.5% in the last decade, is expected to decelerate to 2.2% in the current decade. Population under the age of 60 is expected to decline from 96% in 2012 to 94% by the end of the decade. Meanwhile, the proportion of the population above the age of 60 is expected to increase to 6.0% by 2020, from 4% in 2012; this population is expected to grow at a CAGR of 5.5% till 2020, more than twice as fast as the growth (2.5%) in the previous decade. Population below the age of 60 is projected to grow at 2.0% per annum till 2020, vis-à-vis 3.6% p.a. in the last decade.

With a relatively young population (54% of the Kuwaiti population is under the age of 29), Kuwaiti labor force grew at a faster rate than the total labor force and the non-Kuwaiti labor force. Kuwaiti labor force grew at a CAGR of 1.7% in the last 4 years as compared to a decline of 6.1% in non-Kuwaiti labor force. This rapid growth has put increasing pressure on public sector employment, as Kuwaiti’s perceive public sector jobs to be secure and well-paid with fewer working hours. Kuwaitis held 71.0% of all public sector jobs in 2011 as compared to just 5.0% in private sector.

Despite a move towards diversification, external balances remain firmly linked to oil

Trade surplus will be driven by increasing oil exports that account for over 90.0% of the total exports. Trade surplus is projected to rise 27.3% to USD98.4bn in 2012 on account of a 76.3% increase in 2011. Oil exports are expected to increase 18.3% to USD114.4bn in 2012, while non-oil exports are expected to register 12.3% rise to USD7.3bn in the same period. Crude oil exports rose as, among the OPEC members, Kuwait was one of the few countries with spare production capacity to deal with the supply shortage arising from Libya's civil unrest in 2011 and Iran's sanctions in 2012. Trade surplus would remain high in 2013, representing half the size of GDP, despite a moderation in Kuwait’s oil production as a result of increasing supply from Libya and Iraq. Trade surplus is projected to decline 10.3% to USD88.3bn as oil exports fall 7.9% for the year.

Current account will continue to register healthy surplus as robust trade surplus is expected to offset the non-merchandise deficit. Current account surplus is expected to rise 26.9% to USD86.4bn or 44.2% of GDP in 2012, despite a 26.0% increase in services deficit. Current account balance is expected to register surplus in 2013, led by high oil revenue from exports which would offset marginally the increase in imports and a steady non-merchandise deficit. Similar to trade surplus, current account surplus is projected to fall 11.8% to USD76.2bn or to 39.5% of GDP in 2013.

Portfolio investments abroad would continue to remain volatile due to the government recycling excess oil revenues to invest in foreign equities and bond instruments. Investment in foreign instruments is expected to rise 80.0% to USD16.2bn in 2012; however, it is projected to fall by half in 2013, because the government spending is anticipated to increase as the current development plan gets underway. Other investments, which constitute net overseas loans and investments in shorter-term deposit accounts, are expected to more than double to USD62.0bn in 2012 from 2010. Other investments would continue to stay high at USD60.6bnin 2013.

Inflation under control following an ease of food prices and housing rent

Growth in consumer price index (CPI) decelerated in 2012 as inflation rose just 2.9% compared to 4.7% in 2011. Inflation slowed in all four quarters in 2012, particularly in the second quarter, when there was no change in the CPI. The slowdown was also pronounced in the third quarter, when CPI rose by a mere 0.7% as compared to 1.0% in the same period last year. Moreover, lower inflation signaled by an easing of food prices, rents, and household goods and services component, which represent close to 60% of the index. Inflation for 2013 is expected to register a 3.3% growth, averaging 3.8% between 2013 and 2017 on limited upward price pressures on food and rents.

Meanwhile, wholesale price index (WPI) also showed signs of weakness, rising 1.5% 2012. Import prices, constituting close to 65% of the WPI, registered smaller increase of 1.6% in the same period, compared to 3.2% in 2011. Local prices, which constitute the remaining 35%, rose 1.6%. A strong US dollar versus the Kuwaiti Dinar played a significant role in reducing the cost of imported goods in the second half of 2012.

Interest rates are expected to track the US Fed rate and are likely to remain low

Monetary policy and liquidity conditions in Kuwait will continue to remain largely accommodative. Given the currency peg between Kuwaiti Dinar and the US dollar-dominated basket of currencies, policy interest rates are expected to track the US Fed rate and are likely to remain low. Broad money supply (M3) grew 5.2% in 2012, led by double-digit growth (18.3%) in demand deposits, which in turn resulted in M1 growth of 16.8% and a moderate increase (1.7%) in quasi-money. Going forward, money supply is expected to increase by 11.6% in 2013 owing to a shift in trend as quasi-money increases by double-digits (14.1%), while M1 grows by 4.3%.

Released by Global Investment House.