Mubasher: Kuwait’s economic performance has been mixed of late, however, the recent rise in oil prices, both globally and for the Gulf nation, areis likely to have a positive impact on the country’s budget deficit and gross domestic product (GDP).
Oil prices have rallied since April, which helped boost confidence and narrow forecasts for 2018’s fiscal deficit, the National Bank of Kuwait (NBK) said in a new report, noting that “very subdued inflation supports real household incomes and benefits consumers.”
And while business credit continues to be weak, it suggests that the “better financial outlook is yet to translate into stronger investment.”
The Kuwaiti government’s decision to delay the implementation of the value-added tax (VAT) to 2021 “avoids a nearer-term hit to the consumer sector, but it highlights the risk of pushing back the pace of reforms given the now more comfortable fiscal position and may affect credit outlook,” the Kuwaiti bank highlighted.
It did note, however, that once the VAT is imposed, it will contribute between 1% and 1.5% to Kuwait’s non-oil GDP.
“Excise duties on selected products including tobacco and carbonated drinks are likely to be introduced when parliament resumes in October, but will yield about one third of the expected revenue from VAT,” NBK’s report showed.
Going back to oil prices, those for the Kuwait Export Crude (KEC), which is typically priced at a small discount to Brent, have increased by around 8% month-over-month to $67 per barrel (pb) in April and surpassing the $75 pb-mark in mid-May.
The bank noted that the increase in oil prices came on the back of tighter market fundamentals due to solid global demand growth and oil output cuts by the Organization of Petroleum Exporting Countries (OPEC) and some non-OPEC members like Russia.
The recent sanctions imposed by the US on Iran, and its withdrawal from the nuclear deal, as well as those that may be imposed on Venezuela following the rigged reelection of its President Nikolas Maduro have contributed to bolstering oil prices.
As part of OPEC, Kuwait has largely complied with the supply cuts, having trimmed it output to 2.71 million barrels per day (bpd) in March, down 0.14 million bpd from the reference point in October 2016.
Following the oil price uptick, NBK upgraded its forecasts for Brent crude to $65/pb for 2018 and $60 pb for 2019, while its expects KEC prices to reach $61 pb this year and $56 pb next year, both from $55 pb previously and compared to $50 pb in Kuwait’s official budget.
The bank stressed that these “remain conservative if prices stay at near current levels for the remainder of the year.”
NBK went on to say that the revision was positive for the Kuwaiti government’s budget revenues, 90% of which are derived from oil. Despite that, the budget balance impact will be partially offset by an upgrade to the bank’s spending forecast following revisions to the draft budget made by parliament.
“Under our new assumptions, the deficit for FY2018/19 narrows to 6% of GDP from 10% before, before mandatory transfers to the Future Generation Fund. This does not include the government’s off-balance sheet earnings on its investments overseas, which amount to in excess of 10% of GDP,” the research report highlighted.
