Kuwait: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large oil reserves (6% of world total)
- Accumulation of substantial public and foreign surpluses managed by Kuwait Investment Authority (KIA) sovereign funds
- Political obstacles to structural reforms
- Business climate and competitive context could be improved
- Uncertainties associated with the succession to the Emir and tensions between the Executive and Parliament
- Location in a region of geopolitical tensions, specifically proximity to Iran and Iraq
Slight Recovery Forecast in 2018
The expansion in economic activity will strengthen in 2018. The oil and gas sector, accounting for 50% of national GDP, will remain positive thanks to slowly rising oil prices. The rate of growth could be limited with the renewal of the OPEC agreements, resulting in a cut in production of around 6% in 2017 against 2016. The State retains its central role in the national economy thanks in particular to its five-year development plan to increase the diversification of the economy – involving large scale public investment in infrastructures and a modernization of the refineries. These investments will drive growth in particular in the transport, property and healthcare sectors. They will help boost confidence among consumers and investors, thereby helping consolidation within the non-oil and gas sectors and growth of 2.5% in 2018. Household demand will remain strong in 2018 given the levels of disposable income and despite the austerity measures. However, given the lack of a domestic manufacturing industry, this will tend to drive up imports. The Kuwaiti banking system remains profitable and resilient thanks to strengthened banking regulations imposed by the Central Bank: the defined capital adequacy ratio is much higher than that required under Basel III and the level of bad debt is shrinking. In addition, the sector is not expected to experience a tightening in liquidity as has been the situation in other countries in the region; with the increase in public deposits making it possible to offset the weak expansion in private deposits. The financial sector has proven buoyant given the fall in oil prices and continues to finance the economy as it is able to satisfy the strong demand for private sector credit. Inflation will be higher in 2018, pushed up by the imposition, at the beginning of the year, of VAT at 5% throughout the GCC and increases in the cost of energy and food.
Continued Balance in Public Accounts
With oil receipts accounting for 88% of State income, the falls in the price per barrel since 2014 have forced adjustments to be made in current account spending, to maintain the equilibrium of the public accounts by means of a reduction in subsidies, in particular on electricity and water, and with limits being placed on government employee wages. Despite possible opposition from within Parliament, the Five-Year Plan is expected to remain on track. This capital expenditure will be covered by increased receipts following the moderate rise in oil prices, and fiscal reforms, namely the introduction of VAT and, potentially, through public-private partnerships. The transfer of 10% of State revenues to the Future Generations Fund will continue. This will generate a financing requirements as it creates a deficit of around 10% of GDP, which the authorities aim to cover using foreign debt, thereby avoiding the use of the national savings fund. Kuwait, subject to a highly rated sovereign risk by the three leading credit agencies, because of its substantial credit assets, raised $8 billion in March 2017.
Oil resources guarantee current account surplus
The gradual rise in oil prices in 2017, and that predicted for 2018, will allow Kuwait to improve its current account balance. This upturn will offset the rise in its import bill, reflecting higher prices for consumer goods. The balance of services will remain largely negative whilst the national tertiary sector remains unable to satisfy local strong demand. The current account balance will also be negative as a result of remittances sent by foreign workers living in the country. With currency reserves at 5.1 months of imports, Kuwait can guarantee the pegging of the Kuwaiti dinar to a US dollar-weighted basket of international currencies.
Atmosphere of Political Tension Surrounding Royal Family
The resignation of the government in October 2017, following a censure motion, makes the dissolution of Parliament and the calling of early elections in 2018 likely. The resignation came about in a context of recurrent tensions and impasses between the Parliament and the ruling Al Sabah family, the head of the Executive. The re-election of a Parliament at loggerheads with the government could lead to a political paralysis within the governing institutions and weaken the economy by undermining confidence in the household and private sectors, which determines the management of investments as part of the five-year plan. The issues within the ruling family concerning the Emir’s succession are also clouding visibility on the political future of the country. On the diplomatic stage, the country is working to encourage a return to dialogue between the other members of the GCC and Qatar.