Kuwait: Risk Assessment
Country Risk Rating
Business Climate Rating
- Vast financial buffers offsetting low oil prices, positive international investment position
- Improvements in economic diversification efforts
- Low inflation environment, high living standards
- Low social discontent
- High dependence on oil and on government spending, slow economic diversification efforts
- Delays in parliament to pass the law on public debt
- Continuous stalemate between the cabinet and the opposition-dominated legislative power
- Slow-moving bureaucracy
- High dependence on expatriate workers (70% of population)
Looser OPEC-led production cuts will support economic activity
After recording a sharp contraction in 2020, the Kuwaiti economy is expected to slightly recover in 2021 thanks to supportive base effects, higher oil prices, and looser OPEC+ oil production cuts. The oil sector’s improvement will be vital to bring growth back into positive territory, as it accounts for around 40% of GDP. Increases in global production volumes in 2021 will boost external demand for Kuwait’s exports, as 90% of the country’s exports consist of oil. Consequently, net exports are expected to contribute positively to growth in 2021. The recovery in oil prices should also support non-oil activity, otherwise supported by looser social distancing measures in the absence of a second lockdown. On the other hand, services, which weigh as much as oil in the GDP, are expected to experience a small recovery due to the weakness of real estate and governmental services. The implementation of the VAT in 2021 is not expected to weigh on private demand, as the government has been reluctant to cut workers’ benefits and subsidies. Nevertheless, investments could remain sluggish because of low productivity, slow bureaucracy, and labor constraints.
Risk of running out of cash despite strong financial buffers
Kuwait has very large financial buffers thanks to the vast assets in its General Reserve Fund (GRF) that is managed within its sovereign wealth fund (Kuwait Investment Authority, KIA), of which the assets and income can be used to finance the fiscal deficit. Beyond the GRF, the KIA is responsible for the management of Kuwait’s Future Generations Fund (FGF), as well as other funds on behalf of the State of Kuwait. Total and liquid assets of the GRF are estimated at 56% and 24% of GDP respectively in June 2019, according to the IMF. However, the use of these funds to finance deficits has encouraged wider budget imbalances, resulting in increased financing requirements. Due to the lack of public debt laws (which would allow the government to tap into international debt markets) and rising fiscal pressures, the government’s liquidity risk will rise during the upcoming period. The parliament’s approval of the law halting the automatic transfer of an annual 10% of the state’s revenue to the FGF could also contribute to the depletion of these resources. Although oil prices are expected to inch up in 2021, they seem unlikely to stand above the fiscal break-even price of Kuwait, estimated at USD 65.7 per barrel in 2021. Moreover, with nearly 70% of total government expenditure being related to wages and subsidies, productivity inefficiencies and labor market distortions will persist. However, despite the recent deterioration in the cash position, Kuwait should not be facing major fiscal challenges thanks to its large buffers. Total assets of the KIA and central bank reserves are estimated at 435% of Kuwait’s GDP. The current account balance is expected to remain in deficit, albeit at a smaller level, in line with the decline in oil exports (nearly 90% of total merchandise exports) because of lower oil prices and output, as well as rising imports.
Domestic and regional politics are on the front row of the political scene
Kuwait is a monarchy with an elected parliament and an appointed government. The National Assembly elections held in the last quarter of 2020 are not expected to reduce the tensions between the cabinet and the parliament. After the passing of Kuwait’s 91-year-old emir Sheikh Sabah Al-Ahmed Al-Sabah in September 2020, Crown Prince Sheikh Nawaf Al-Ahmed Al-Sabah has been announced as the new emir. He is expected to appoint a crown prince who should play a bigger role in the daily management of the country. The most challenging issues that the administration will have to deal with in the upcoming period would probably be related to the rising fiscal pressure and new public debt law. The emir will also face the challenge of whether to establish relations with Israel, following the footsteps of its neighbors such as the United Arab Emirates and Bahrain, a decision that can be highly unpopular among the public. Another question will be if Kuwait will continue to stay impartial in the blockage against Qatar imposed by Saudi Arabia, the United Arab Emirates, and Bahrain.