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Despite spending rise, Kuwait''s budget set for large surplus  Join our daily free Newsletter

MENAFN - Kuwait News Agency (KUNA) - 03/11/2012

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(MENAFN - Kuwait News Agency (KUNA)) Despite considerable increase in expenditure, Kuwait's budget for fiscal year 2012/2013 is set for a large surpluses backed by resilient energy sector, a specialized economic report by the National Bank of Kuwait (NBK) expected Friday.

"The Amir recently approved by decree the much-delayed budget law for FY 2012/13, which had been held up by the absence of a sitting parliament.

The budget shows a 9 percent increase in planned spending to KD21.2 billion, which should in principle be supportive of an economy struggling to gain momentum," reads the report.

The NBK, however, noted that the actual spending traditionally undershoots its target and because of this year's delay, it is subject to even greater uncertainty than usual.

"Either way, another large budget surplus looks likely. All of the increase in planned expenditures comes from current spending (including wages, subsidies and transfers, amongst other things), which is budgeted to rise 12 percent to KD18.6 billion, "Of this increase, more than half comes from spending on power generation.

Traditionally, budget targets in this area reflect the government's oil price assumption, which dictate the theoretical cost of purchasing fuel. This year, however, the increase in the budget oil price from USD 60 per barrel (pb) to USD 65 pb seems too small to have generated such a large effect.

The bulk of the increase could instead stem from increased power output in light of recent capacity additions, "The rest of the increase in current spending comes largely from (civilian) wages and salaries, which are seen rising 16 percent. Around half of this increase comes from the Ministry of Education.

The planned increase in total wages and salaries, although significant, is lower than the 24 percent increase the previous year.

Nevertheless, it should still provide support for growth in consumer spending, which has been the backbone of the non-oil economy in recent years. In total, wages and salaries account for 24 percent of overall budget spending are up slightly from previous years." The report also added that the capital spending is budgeted to decline by 6 percent this year, to KD 2.6 billion.

"This comes at a time when higher government investment is much needed both to support the economy and to kick-start lackluster infrastructure spending in the government's development plan, which is now in its third year. A combination of bureaucracy, technical challenges and political constraints has already slowed project execution to a crawl." The NBK report, however, said that the budget figures on capital spending need not be quite as bad as the headline figures suggest.

"Firstly, given the budget's late approval, lower investment spending targets may reflect the limited time remaining this year rather than a lack of ambition.

Secondly, the drop in capital spending stems entirely from a fall in investment in the power sector, which may reflect the end of a recent project cycle; excluding this, capital spending is projected to rise 10 percent. Finally, because of an especially weak execution rate last year, actual investment spending could still rise this year, despite the lower budget allocation. Note also that some public capital spending takes place off-budget, " it noted.

Data also showed that the total spending looks set to provide modest support for the economy for the remainder of this year.

"Actual spending in FY2011/12 stood at KD 17.0 billion, 88 percent of its targeted budgeted level. A rise in the execution rate to a more historically typical 94 percent would see total spending rise by 17 percent y/y.

However, the budget's delayed approval and the absence (so far) of some of the budgetary detail - notably on the large 'Miscellaneous and transfers' segment, which includes some important transfer payments - increase the uncertainties surrounding any projections.

The NBK also expected a four percent hike in total budget revenues to KD 13.
9 billion.

"Oil revenues account for nearly all of this increase. Despite nudging up its oil price assumption, the government's revenue projection remains extremely conservative and - as in previous years - budget revenues are likely to end up much higher than expected. Indeed, the price of Kuwait Export Crude has averaged USD 106 pb in the first 7 months of this fiscal year.

Although no official data has yet been published, we estimate that the government may have reached its total year revenue target in September, "Non-oil revenues are projected to rise by 2 percent to KD 1.2 billion. However, they account for a very small share of total projected revenues, at 8 percent.

Both (corporate) income tax charges and revenues from land sales are expected to rise strongly. Miscellaneous payments (which include UNCC payments as a legacy from the Iraq war) are expected to fall, but have substantially overshot budget projections anyway in recent years. Judging by previous experience, non-oil revenues will come in somewhat higher than expected."

Based upon the government's projected spending numbers and revenue assumptions, the NBK report estimated that the oil price needed to balance the official budget is USD 97 pb, up from USD 86 last year.

The number falls sharply if - as we expect - oil production turns out to be higher or government spending comes in lower than projected.

"In reality therefore, the overall fiscal position is expected to remain extremely strong. Using the conservative official oil price assumption, the government projects a deficit of KD 7.3 billion for FY12/13 - a record high.

But with oil revenues likely to be stronger - and spending levels weaker - than projected, we think another large surplus is more likely, the fourteenth in a row. If oil prices stay at recent levels, a surplus of KD 10 billion looks plausible. This would equate to around 20 percent of GDP, compared to a surplus of 30 percent of GDP recorded last year.

" Finally, the NBK unveiled that allocations to the Reserve Fund for Future Generations (RFFG) have increased to 25 percent of total revenues, from 10 percent in previous years.

"This appears to be partly an accounting change - directing funds to the RFFG that would otherwise be held by the General Reserve.

Total allocations to the RFFG are budgeted to rise to KD 3.5 billion. Under our higher revenue estimates, however, they could be as large as KD 7 billion."


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