Kuwait: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large oil reserves (9% of the global total)
- Very solid financial situation thanks to the accumulation of considerable public and external surpluses, managed by the Kuwait Investment Authority (KIA) sovereign fund
- Welfare state financed by the oil windfall
- Political obstacles to structural reforms
- Business and competitive climate can be improved (country ranked 104th out of 189 by the World Bank)
- Located in a region with acute geopolitical tensions, linked in particular to the proximity of Iraq and Iran
Slight recovery forecast in 2017
The acceleration in economic activity in 2016 is expected to moderate in 2017. Despite the drop in oil prices, increased hydrocarbon production contributed positively to growth, reaching a peak close to an average of 2.91 mbd in 2016 compared with 2.86 mbd in 2015.However, the rise in oil production will continue to support economic growth to a lesser extent in 2017. The non-oil economy could be tested by the slowdown in public spending. Construction, which showed signs of slowing down in 2016 following a fall in sales will benefit from a housing plan for 11,000 units initiated by the public housing authority. Moreover, some infrastructure investment marked as a priority in the five-year development plan is likely to be maintained. Household consumption will still contribute substantially to activity. Nevertheless, its dynamism could be tested by fiscal adjustments to wages and subsidies. Moreover, tensions between the newly elected parliament and the government could damage household and the private sector confidence. Inflation will remain high, fuelled by upper energy prices.
Moderate, but clear increase in the fiscal and current account surplus
The significant rise in oil production led to higher public revenues in 2016, while the price per barrel hit its lowest levels since 2004. So, while public spending has grown, the public accounts balance has remained in positive territory. In 2017, the fiscal surplus is expected to get bigger. Oil revenues will rise less rapidly than in 2016, but spending is likely to decline. Capital spending will fall slightly but the most important part of this decline will be attributable to a contraction in current spending. The growth in spending on wages is likely to be contained by a less expansive recruitment policy as well as better wage control. The increase in electricity and water prices, which comes on the back of a rise in energy prices, will enable a reduction in subsidies. Transfers of 10% of revenues to the fund for future generations will be renewed, leading to a borrowing requirement which the authorities intend to meet through external borrowing. The government balance after transfers to the fund for future generations should show a deficit in excess of 10% of GDP. Kuwait, which enjoys the highest sovereign risk rating thanks to substantial assets, plans to benefit from low international interest rates and foreign investor appetite for bonds issued by the GCC countries. The government is planning to borrow over USD 10bn in 2017.
Because of weak oil prices in 2016, the current account surplus shrank but remains positive. However, it is expected to grow in 2017 insofar as hydrocarbon prices recover.
Kuwait's banking sector remains profitable and robust, thanks to stronger banking regulation by the central bank. The capital adequacy ratio imposed is well above that required by Basel III and the ratio of non-performing loans is declining. Moreover, the latter is unlikely to be confronted by tighter liquidity as observed in the other countries of the region, since the growth in public deposits helps offset the timid growth in private deposits. Nonetheless, sluggish consumption and private investment could be reflected in a deceleration in credit.
New parliamentary elections against a background of protests
The recent decisions concerning the reduction in subsidies and reform of civil service wages led to renewed tensions on Kuwait's political stage resulting in the dissolution of parliament in October 2016. The November 2016 early elections were marked by an amendment to electoral law amending the principle of eligibility and accordingly excluding a section of the opposition, which had made a major comeback after boycotting the previous elections of 2013 and 2016. As relations between the parliament and the Al Sabah royal family, in charge of the executive, are characterised by recurring periods of lack of co-operation, the election of a parliament which disagrees with the government could result in political paralysis at leadership level and weaken the economy at a time when the problems relating to the succession of the Emir within the ruling family are making the country's political future unclear. The business climate is expected to improve slightly, following the reform of the investment code.