Economic Analysis - Commitment To OPEC Cuts Will Constrain Growth - APR 2018

BMI View: Real GDP growth will recover in Kuwait in 2018, albeit at a more modest pace than previously anticipated owing to the extension of the OPEC oil production cuts. That said, rising oil prices will enable a shift away from fiscal consolidation and boost non-oil activity, tempering the effect of weak oil production on economic growth.

We expect economic activity to recover in Kuwait in 2018, albeit at a weaker pace than initially expected. We have downgraded our real GDP growth forecast to 1.9% for the year, compared to 3.3% previously, up from an estimated contraction of 1.4% in 2017. This revision is largely based on the decision in November 2017 to extend the OPEC, non- OPEC deal until end-2018, which will keep Kuwait's oil production flat this year. Nevertheless, rising oil prices will provide significant breathing space for the government, allowing a return to a more expansionary fiscal policy. This will in turn add momentum to domestic demand and boost business confidence, partially offsetting the effects of flat oil production on real GDP growth.

Real GDP Growth Still Tightly Linked To Oil
Kuwait - Oil Production & Real GDP, % chg y-o-y
e/f = BMI estimate/forecast. Source: BMI, National Sources

OPEC Deal Will Strangle Oil Production In 2018...

The extension of the OPEC, non-OPEC oil supply deal will significantly hinder real GDP growth in 2018. In November 2017, the output cuts were extended until the end of 2018 (compared with end of H118 previously). Combined with our expectations for Kuwait's compliance with the deal to remain strong throughout this year, our Oil & Gas team now expects oil production to grow by a mere 0.2%, down from a previous forecast of 3.3%. With the oil sector accounting for 57.0% of real GDP in Q317 (latest available data), we expect this weak outlook to weigh heavily on real GDP growth in 2018, particularly through the export channel.

...But Higher Crude Prices Will Boost Non-Oil Economy

That said, we expect rising oil prices to boost the government's fiscal position, with positive effects on the wider non-oil sector. Our Oil & Gas team forecasts Brent to average USD65.0/barrel (bbl) in 2018 and USD69.0/bbl in 2019, up from USD54.8/bbl in 2017. With oil proceeds accounting for an average of 90.4% of total fiscal revenues in 2013-2017, the rally in prices will enable the government to increase expenditures and support the non-oil economy, following more restrained spending in 2017 (see Rising Oil Prices Will Shrink 2018 Fiscal Deficit, January 5). Notably, the FY2018/19 budget (starting on April 1) includes a 12.4% y-o-y increase in subsidies, indicating that fiscal consolidation is increasingly off the cards. The government's move towards a more expansionary budget will result in rising spending power for Kuwaiti consumers, and boost business confidence. This supports our view that the non-oil economy will see some improvements over the course of 2018, somewhat moderating the impact of weak oil production on overall real GDP growth.