(MENAFN- Arab Times) A report issued by "KFH-Research", a subsidiary of Kuwait Finance House KFH, stated that the budget surplus of the fiscal year 2013\2014 ranges between KD 12-14 bln which confirms the robust financial stance of Kuwait; especially that the country posted budget surplus for the 13th consecutive year.
However, the report mentioned that government should be cautious in matters of reducing spending, diversifying government income resources and increasing privatization efforts. Increasing the exerted efforts in business diversification contributes in reducing the economic impacts of fluctuations in world oil prices. Despite the recent softness in oil prices, Kuwait is on target to register a budget surplus for the 13th consecutive fiscal year at between KD 12bln and KD 14bln from KD 12bln in FY2012/13. As a percentage of GDP, the general government budget has been in surplus by more than 10% of GDP for more than a decade.
Gains
Oil prices made a reversal in gains in early September 2013 from August 2013 due to easing in geopolitical tensions in the Middle East. Kuwait Export Crude (KEC) price is trading at $106.5pb in late October, which is below a peak of $112.8pb registered in late August 2013. Nevertheless, the average price through mid-October 2013 of $108.4 was still the highest since February 2013. Brent crude prices followed a similar pattern, falling from a peak of $117pb in early September 2013 to $108pb by the start of October 2013. Seasonal factors may also have played a role in the decline as oil demand in the GCC, particularly in Saudi Arabia, tends to fall as temperatures drop in the post-summer months, releasing more crude for export.
Finally, the market was under pressure from the expectation, subsequently unrealized, that the US Federal Reserve would start to reduce its monetary stimulus, which would dampen economic growth prospects. Of course, this concern didn't materialise in the end.
To showcase the impact of oil on the budget surplus, several case scenarios are reviewed by taking into account of different oil prices - which averages in a band of $103.9pb to $106.2pb. Under the base case scenario, Kuwait's total revenue is projected at KD 33bln for the 2013/2014 fiscal year on expectations of resilient global oil prices and this is slightly better than the KD 32bln income from last fiscal year.
At the worst extreme, total revenue is estimated a tad lower at KD 32bln. Government expenditure is projected to be about 2% lower than the actual figure of KD 19.3bln in the previous fiscal year under the base case scenario while in the worst case it is expected to be 4% higher. (The actual budget forecast for 2013/14 estimates the government expenditure at KD 21bln and historically the actually expenses is usually 5-10% lower than that).
Assumption
Kuwait traditionally underestimates its oil price assumption and set it at just $70.0pb for the FY 2013/2014 budget plan, resulting in a revenue projection that is normally lower than actual figures. That said, oil prices (Kuwait Export Crude) have thus far averaged at $104.2pb from April 2013 to Oct 21, 2013. For the remaining five months (November 2013-March 2014) of FY2013/14, we expect oil prices to remain firm as economic data from US and China has been relatively positive. In addition, anxiety over the Euro-area sovereign crisis has also receded recently. Given that the breakeven oil price to balance the budget is pencilled in at a lower level of $70 per barrel compared to current market prices, budget balancing shouldn't be an issue. Nevertheless, an increase in operating expenses represents a tail risk to the budget baseline in the event of any oil price or production shock.
Even in the face of higher civil servants wages and increased government spending and subsidies, the non-oil revenue contribution to the economy remains insignificant. Following the KD 2bln contribution from the non - oil sector in the last fiscal year, the sector's contribution is envisaged to remain muted for the upcoming fiscal year. Another external risk is the possibility of tighter financial conditions if the US Federal Reserve reduces its bond buying or the Euro-area sovereign crisis re-emerges.
This could dampen oil outlook and put downward pressure on prices. Studies have shown that as long as oil prices remain above the GCC budget breakeven of $80pb, there should not be major concerns over their financial position. Nevertheless, lower oil prices would weaken money supply and dent the recovery in private sector credit growth. However, with Kuwait's oil prices projected above $100pb even in the worst case scenario, it is rather limited there would be any weakening to its financial strength. Kuwait's budget surplus of 24.7% to GDP recorded last year is already one of the highest level in the world.
With budget surplus/GDP projected at 26.7% for the coming fiscal year shows that Kuwait's financial position is growing from strength to strength with the economy in sight to register a 13th successive budget surplus. In addition, Kuwait has posted current account surpluses averaging more than 25% of GDP between 1994 and 2012, largely because of the strength of oil exports. Nevertheless, the government has to be prudent in reducing expenditures, diversifying the sources of government revenue, and increase privatisation efforts. Increasing efforts to diversify the base of economic activities can reduce the effect on the economy during fluctuations in world oil prices.
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.