KUWAIT

A very high dependence on the hydrocarbon sector and global oil prices has resulted in regime of low and volatile GDP growth since 2013. Kuwait possesses the world’s seventh largest proven oil reserves (6% of global resources) and, at current rates of extraction, its oil will last for another 85 years. Gas reserves have a lifetime of over 100 years. The hydrocarbon sector dominates the economy (around 55% of GDP or 90% of total government income or over 80% of export revenues). However, due to lower oil prices in recent years as well as recurrent deals by OPEC and non-OPEC members (called OPEC+) since 2017 to limit oil production in order to stabilize prices, average annual growth was negative at -1.0% in 2013-2020 after +6.1% in the preceding decade.

Kuwait’s recovery from the double shock of the global Covid-19 crisis and the drop in oil prices in 2020 is forecast to be gradual. Those shocks hit the economy hard and real GDP contracted by a hefty -8.9% in 2020, much stronger than the GCC average of -5.1%. Looking ahead, the oil sector should benefit from higher prices and OPEC+’s decision to ease output cuts. But the non-oil sector’s recovery in 2021 has been uneven as the authorities tightened lockdown measures again in Q2-Q3 in response to a renewed surge in Covid-19 cases amid a slow vaccine rollout in the country. And although Kuwait is a wealthy sovereign, fiscal stimulus is largely absent because of a long-standing deadlock between the parliament and government over debt financing, which poses risks to the outlook. We forecast annual real GDP to expand modestly by around +2% in 2021 and +3.5% in 2022.

Inflationary risks will remain low overall. The Kuwaiti dinar (KWD, the local currency) is pegged to a basket of currencies dominated by the US dollar, which has kept the exchange rate close to KWD0.30:USD1 over the past two decades. The peg has ensured relative price stability for more than ten years and we expect it to be maintained over the next two years, at least, despite occasional speculation about unpegging or devaluation. Consumer price inflation ticked up to slightly over 3% in the first half of 2021 due to higher energy prices, global supply-chain disruptions and a recovery in domestic demand, a trend seen in many other countries as well. We expect these pressures to fade over the following 12 months or so and forecast average annual inflation of around 3% in 2021-2022.

The business climate in Kuwait is below average in our assessment of 185 economies. The World Bank’s annual Worldwide Governance Indicators surveys indicates weaknesses with regard to the regulatory and legal frameworks as well as a significant level of perceived corruption. The Heritage Foundation’s Index of Economic Freedom (IEF) survey 2021 ranks Kuwait 79 out of 184 economies (below the other five GCC countries but above Turkey, Morocco and South Africa). The IEF notes lingering institutional weaknesses, including a judicial system that lacks capacity to defend property rights effectively, and widespread corruption. Given the state’s tight control of the upstream hydrocarbons sector and a relatively small private sector, business opportunities are limited. The banking system is capable of broadly withstanding significant shocks, given its comfortable capital and liquidity buffers and oversight of the central bank. With regard to environmental sustainability, Kuwait scores badly, owing to the non-existence of renewable electricity output, a high level of water stress and a very low recycling rate. It does somewhat better with regard to energy intensity, CO2 emissions and climate change vulnerability. Overall, however, Kuwait ranks 149 out of 210 economies in our proprietary Environmental Sustainability Index.