Kuwait- GDP growth seen at 4.5% in 2013, 5 percent in 2014 

(MENAFN - Arab Times) Having rebounded from the Global Economic Crisis in 2009 with economic growth of 11.4% in 2010 and an estimated 8.2% in 2011, we retain our real GDP growth forecast of 5.2% for 2012 as we expect Kuwait's economy to grow steadily on the back of sustained inflows from oil exports, rising foreign direct investment (FDI) and a boost in private and government consumption arising from record budget surplus registered for the first eight months of FY2012/13.

Looking ahead, real GDP growth is expected to remain resilient at 4.5% in 2013 and 5.0% in 2014 on expanding oil production and exports. Kuwait's economic growth will be driven by expansion in government expenditure and private consumption with possible upside surprises coming from the private investment as we expect FDI inflows to pick-up amidst improving business conditions.

Kuwait has boosted its oil production in 2012 to an average of 2.8mln bpd, up from 2.5mln bpd in 2011. Kuwait still has 400,000bpd of oil capacity before reaching its maximum oil production volume of 3.2mln bpd. Any ramp up in daily oil production will boost revenue and hence, a favourable fiscal outlook. Nonetheless, we do not expect Kuwait to lower oil production substantially in the near-term as major adjustments in output under the Organisation of Petroleum Exporting Countries' (OPEC) has traditionally been the role of its neighbour, Saudi Arabia, due to its enormous estimated capacity of 12.5mln bpd which stands to be the most adversely affected if oil prices decline.

Capable
It should also be noted that Kuwait has the fifth largest oil reserves in the world at 102mln boe (barrels of oil equivalent) and is capable of further boosting its oil production and exports by tapping on its massive reserves. In addition, signs of recovery in the US and China may likely bolster the global demand for oil and hence, underpin rising oil production from the GCC economies including Kuwait.

Kuwait's trade surplus continued to expand at double digit rates for 2012 driven by healthy exports on the back of uplift in oil production. Total exports grew by an estimated 23.3% to KD 32.9bln in 2012 with oil exports forming more than 90% of total exports. Meanwhile, import growth is estimated to have registered a slower pace of 8.1% for 2012 to KD 7.5bln in 2012 resulting in the trade surplus to widen by an estimated 28.3% to KD 27.7bln for 2012, which is KD 6.1bln higher than 2011.

While Kuwait's oil export growth pace of 23.2% for 2012 was the main driver for total exports, non-oil exports which include goods & services such as manufactured chemicals and consumer goods have also grown exceptionally well at an estimated 24.8% in 2012, signifying a general improvement in global demand as well as a certain degree of effectiveness in Kuwait's diversification move to reduce its dependence on oil revenue.
Besides a boost in oil production, Kuwait's healthy trade balance for 2012 is also a result of elevated global oil prices, which averaged at around 109.5pb in 2012 based on the Kuwait export crude oil spot price. Given that the crude oil price continued to rise to 114.5pb as at 12 February 2013 as well as OPEC's recent statement, which raised its 2013 forecast for global oil demand by 800,000bpd to 89.7 million bpd, we expect Kuwait's trade surplus to remain healthy for 2013.

Kuwait's government recently introduced a new companies' law to replace the old Commercial Companies Law of 1960 with the aim to bolster foreign direct investment (FDI) in the country. FDI inflows to Kuwait rose by 25.1% y-o-y to 398.6mln in 2011 from 318.7mln in 2010. We believe FDI inflows into Kuwait will increase further in 2013 and the years ahead following this new regulatory development.

Kuwait has made some headway in improving its business environment in the recent years including the introduction of 15.0% flat corporate tax rate for foreign companies in 2008 and the passing of the 2001 law regulating the foreign direct capital investment which allows 100% foreign ownership of companies in some sectors. With these steps, the perception of Kuwait as the least business-friendly country in the Gulf Cooperation Council (GCC) is expected to improve, paving way for greater influx of FDI. Furthermore, the launch of the Kuwait Development Plan (KDP) looks set to push ahead many infrastructure projects. As such, the state is set to become a hub for private infrastructure investment over the coming years.


Kuwait's budget surplus for the first eight months (April 2012 - November 2012) of the fiscal year (FY) 2012/2013 reached KD 14.7bln (52.0bln), exceeding the KD 11.6bln surplus recorded at the end of the same period of FY 2011/2012, data from the Central Bank showed. Revenue stood at KD 21.6bln at the end of November 2012, far exceeding the budgeted amount of KD 9.3bln. Oil revenue made up almost all of the government's income, accounting for nearly 95.0% of the total revenue. Expenditure fell short of the budget target for the period by KD 7.2bln, reaching KD 6.9bln.
Capital expenditure growth will remain modest, but current expenditure will increase as the government wage bill rises. In addition the government has been forced to raise the government servants' salaries following some strikes by public-sector workers. We maintain our FY2012/13 budget surplus forecast at 26.4% of GDP following lower current and capital spending as well as the expectation of higher revenue collection.

Inflation
Inflation trend in Kuwait continued to be pressurised by the housing segment and imported food prices. These, nevertheless, have moderated in the recent months. The annual inflation rate slowed to 2.9% in 2012 from 4.7% in 2011 in view of slower trend in housing and food inflation. Looking ahead, Kuwait's inflation rate is expected to remain at a manageable level of 3%-4% for 2013-2014 as the housing segment, which accounts for 26.7% of the CPI basket, is expected to remain stable partly due to depressed rental rates from a drop in number of expatriates amidst the on-going political instability in the region.


Kuwait interest rates generally track those set by the US Federal Reserve as the US dollar (USD) makes up the bulk of the undisclosed, trade-weighted basket of currencies to which the Kuwaiti dinar (KD) is pegged. However, the Central Bank of Kuwait has cut its discount rate from 2.5% to 2.0% in early October 2012, its first rate cut since February 2010 as benign inflation trend paved the way for growth objective. Kuwaiti interest rates are forecast to stay largely unchanged until the Federal Reserve starts to tighten its monetary policy in mid-2015. However, any unexpected rate cut by the Central Bank of Kuwait will likely stimulate the banking sector lending to the housing sector and hence, boost loan demand. Lending to the private sector has picked up slightly in 2012, expanding by a monthly average of 4.0% y-o-y compared with around 2.0% over the same period in 2011.