Kuwait’s economic outlook weakens as the government holds back on spending, agree ECR experts

Kuwait, rated AA by Fitch and S&P, is showing signs of increased risk among its economic and political sub-components due to a growing disparity between vast government revenues and lower government spending, resulting in lower-than-expected real GDP growth forecasts. This is reflected in ECR’s survey, which shows that the sovereign’s ECR score fell by 1.8 points since January, to 66.9 in August, the largest score decrease among the Gulf Cooperation Council (GCC) member states. This change has now left Kuwait’s ECR score on par with Oman, despite having much greater oil reserves.

Source: ECR

Accounting for these score trends, Nassib Ghobril, chief economist at Byblos Bank and one of ECR’s contributors, states: “The Kuwaiti economy has the potential to grow at a much higher rate than it has grown over the past few years. Further government investment and full implementation of the government’s development plan would therefore unlock the potential of the economy.” ECR data show that economists have huge confidence in the sovereign’s government finances. Kuwait’s government finances score stands at 8.9 points, an increase of 0.3 points since January. This falls on the back of Kuwait’s ministry of finance reporting a $47 billion dollar surplus in 2011, accounting for approximately 29% of GDP. This has left Kuwait with the highest government surplus in the region and the fourth strongest globally. It has consistently generated huge surpluses from its large oil revenues, which account for approximately 80% of government income and 93% of export revenues, according to Organization of the Petroleum Exporting Countries (OPEC).

Source: ECR

The government has enjoyed a strong budget surplus, but economic activity has weakened between 2011 and 2012 on the back of lower government spending, proportionate to the size of its budget surplus. This is surprising, given that “all the elements and resources to perform at a much higher rate are there”, says Nassib. “It has a very high level of income, GDP per capita is one of the highest in the world and it is resource wealthy.” Wichai Turongpun, economist at Arab Banking Corporation, believes Kuwait’s economy is not performing due to political bottlenecks holding back investment. “Oil revenues remain the backbone of the Kuwaiti economy, keeping it afloat for the time being,” he says. “However, Kuwait’s risk assessment is being pushed down because of the political situation, which cannot pass the required fiscal policies needed to reach the desired economic growth rates. This means Kuwait’s risk assessment will remain behind Qatar for the time being.” This is affirmed by January’s GCC outlook report, which indicated that government spending is not likely to support economic growth in 2012, as the government has held back too long on implementing proposed development projects. As Ghobril states: “The main obstacle to spending and implementing the development plan has been domestic politics, involving the various confrontations in parliament.” These developments have left Kuwait with the second-lowest economic outlook score among the GCC states, after Bahrain. This follows on from the National Bank of Kuwait revising its real GDP growth forecast down to 5.4% for this year compared with 5.6% for last year.

Source: ECR

However, emerging signs of risk within the Kuwaiti economy have not been drastic enough to offset its relatively stable position on ECR’s rankings. Kuwait’s ECR score ranks joint second (with Oman) among the GCC states and 28th globally. Only Qatar lies above Kuwait, with a 6.1 superior risk-assessment score.

This article was originally published by Euromoney Country Risk.