Kuwait's non-oil growth to accelerate to 3.52 in 2014

KUWAIT CITY Sept 29 (KUNA): Kuwait's economic activity has picked up further in 2014 according to the preliminary findings of the IMF mission who concluded a visit to Kuwait on Sept 25. In their report titled 'Kuwait: Concluding Statement of the 2014 Article IV Consultation' the IMF official staff affirm that non-oil growth is projected to accelerate to 3.5 percent in 2014 from an estimated 2.8 percent in 2013 driven by a combination of continued increase in domestic consumption and some pick-up in government capital spending and private investment.

Flat oil production in 2014 over 2013 would keep the overall real GDP growth positive at 1.3 percent compared with -0.2 percent in 2013. The average inflation rate is forecast to remain about 3 percent in 2014. The current account surplus is expected to remain high at about 38 percent of GDP in 2014. A fiscal surplus of 26 percent of GDP is projected in 2014 supported by high oil prices but with increases in salaries and subsidies it will be down from about 35 percent in 2013.

Total spending is projected to rise by 25 percent in the FY 2014/15 budget reflecting both increased current and capital expenditures. Kuwait's current near-term economic outlook is positive. Non-oil GDP growth in Kuwait is expected to further accelerate to 4.0 percent in 2015 and is projected to increase to 4.5-5.0 percent in the medium term in the baseline scenario supported by government investment in infrastructure and oil sector private investment and consumption.

Inflation is projected to increase to 3.5 percent in 2015. A moderate increase in oil production is expected to further support overall growth. The external current account and fiscal surpluses are projected to remain high but would decline over the medium term as oil prices are projected to gradually fall.

An enduring political agreement on the reform agenda is required to improve the overall business confidence and the investment climate to achieve the projected non-oil growth rates.

The government's new five-year Development Plan (DP 2015-19) is scheduled to be placed before the parliament shortly. Given under execution of spending and delays in initiating and completing priority projects in the previous plan the new plan should set realistic targets that are consistent with the overall economic objectives.

Monitoring and ensuring implementation of the DP are also important to sustain investment and support high non-oil growth over the medium term according to the report.

Staff's analysis shows that a $20 decline in oil prices relative to the baseline would result in reversing of the fiscal position (excluding investment income) from a surplus to a deficit in the medium term.

However while large fiscal buffers would allow the government to smooth public spending in the medium term in the event of a sustained oil price drop this would come at the cost of lower saving for future generations.

The breakeven oil price-the price needed to balance the budget at current expenditure levels-has risen over the past few years and is estimated at $75 in 2014/15 (excluding investment income).1 All these factors would adversely affect long-term fiscal sustainability warranting restraint in current spending growth. On the other hand an increase in geopolitical risks and unrest in key oil exporting countries pose upside risks to Kuwait's hydrocarbon production and prices.

Surges in global financial market volatility would likely have limited effects on the financial health of banks. Banks have direct exposures to the cyclical real estate sector and equity (24 percent of total assets) thus exposing them to a downturn in real estate and equity prices.

In addition banks have 19 percent of total assets in real estate and equity collateral. The high capitalization and provisioning levels however provide substantial loss absorption capacity that has been validated by the central bank's stress test results but there could be pockets of vulnerabilities that the central bank is proactively monitoring and mitigating by using macro-prudential tools.

An abrupt change in global financial market conditions could however increase market and funding risks for investment companies (ICs) forcing further deleveraging of proprietary positions for some of them as well as adversely affecting fiduciary assets.