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Abu Dhabi, UAEMonday 25 June 2018

Kuwait's financial buffers help it slow down fiscal reforms, economists say

The country's active parliament also influences the pace of reforms

Kuwaiti Finance Minister Nayef Al Hajraf,  said that reforms start with curbing spending while maintaining a healthy rate of capital expenditures on infrastructure. YASSER AL-ZAYYAT/AFP
Kuwaiti Finance Minister Nayef Al Hajraf, said that reforms start with curbing spending while maintaining a healthy rate of capital expenditures on infrastructure. YASSER AL-ZAYYAT/AFP

Kuwait’s financial buffers will help it cope with the low oil price environment, but delayed reforms may pose threats to the Arabian Gulf state’s attempts to lower its fiscal deficit, economists said.

The country revealed an expansionary budget last week, in line with its regional peers, but made no mention of when it expects to introduce VAT and excise taxes, two vital reforms introduced by the UAE and Saudi Arabia.

All six GCC states agreed in 2016 to implement a 5 per cent VAT and introduce excise taxes, as part of reforms to raise government revenues, which have been negatively affected by the crash in oil prices since late 2014. All laws in Kuwait must be rubber-stamped by the country’s parliament, which frequently opposes bills introduced by the government, especially those that adversely affect the cost of living.

“The unique political system of Kuwait makes the process of enacting reforms and spending cuts more difficult than other GCC states, given the role of the powerful parliament there,” said Mohamed Bardastani, a senior Middle East economist at Oxford Economics.

“Additionally, Kuwait is under less financial pressure compared to other GCC countries given its substantial financial buffers, and as such the overall pace of reforms has been slower.”

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Kuwait, the third-largest oil producer in the Gulf, slightly increased spending in its 2018-19 financial year (beginning on April 1) to 20 billion Kuwaiti dinars (Dh245.1bn) from 19.9bn dinars forecast for the year in the previous year’s budget.

The country’s fiscal deficit will reach 6.5bn riyals in the 2018-19 fiscal year after the transfer of 10 per cent of total revenue to the Future Generations Fund, a nest egg for Kuwaitis.

Standard & Poor’s affirmed its AA/A-1+ ratings for Kuwait on Saturday, maintaining its “stable” outlook of the country.

“The stable outlook reflects our expectation that Kuwait’s public and external balance sheets will remain strong over the forecast horizon, backed by a significant stock of financial assets,” S&P said.

“We expect these strengths to offset risks related to lower oil prices, Kuwait’s undiversified economy, and rising geopolitical tensions in the region.”

Kuwait assumes an oil price of $50 per barrel versus the last budget’s forecast of $45 per barrel.

The country has the lowest fiscal break-even Brent price in the Gulf region and the largest fiscal and external buffers thanks to its estimated sovereign net foreign assets at about 500 per cent of GDP, according to rating agency Fitch.

“We believe that reform starts with curbing spending while maintaining a healthy rate of capital expenditures on infrastructure and minimising the impact of our fiscal reforms on citizens,” Kuwaiti finance minister Nayef Al Hajraf said when announcing the budget last week.

Kuwait joined Saudi Arabia and Dubai in unveiling expansionary budgets for this year in a bid to propel growth.

Saudi Arabia, the Arab world’s biggest economy, approved a budget of 926bn riyals (Dh906.88bn) in December, with a deficit forecast of 195bn riyals or 7.3 per cent of the GDP, compared with a shortfall of 230bn riyals (8.9 per cent of GDP) last year. Dubai’s expenditure will surge 19.5 per cent to Dh56.56bn in 2018, as the emirate ramps up infrastructure spending to finance Expo 2020-related projects.

Kuwait is increasing its construction budget by 14.7 per cent in the 2018-219 fiscal year as it seeks to boost non-oil sector growth.

National Bank of Kuwait, the country’s largest lender, is projecting a pick-up in growth, which will reach 2 per cent this year.

“The increase in growth is coming from better non-oil growth of around 3.5 per cent as the economy recovers from a slowdown that followed the fiscal consolidation in the wake of the 2014 decline in oil prices,” said Nemr Kanafani, head of research at NBK.

“Oil revenues are expected to increase mainly on account of a higher price in the budget, but production will remain mostly flat as Opec member countries maintain their reduced crude oil production levels.”

Oxford Economics is more bullish, forecasting 2.4 per cent growth, thanks to the recovery in oil prices. S&P is forecasting a 2.5 per cent increase for 2018, rising to an average of around 3 per cent between 2019-21.