The Kuwaiti economy will recover, but sluggishly: Fitch Solutions

We break down the report just published by Fitch Solutions, predicting Kuwait's economic comeback after COVID-19.
The Kuwaiti economy will recover, but sluggishly: Fitch Solutions

Fitch Solutions, the subsidiary of the renowned US-based credit ratings agency Fitch Ratings, released an article titled “Kuwait Recovery Prospects Dampened By Fiscal Tightening” where they expect a “fairly sluggish” economic recovery in Kuwait, projecting real GDP growth of just 3.1% in 2021, after a fall of 5.5% in 2020. Fitch Solutions is pessimistic about the economy due to limited fiscal flexibility and the emergence of a second wave of COVID-19 cases which will keep the authorities reluctant to further ease restrictions on non-oil activity. The oil sector, by contrast, will perform well in 2021 as current OPEC+ supply restrictions are gradually eased, allowing production to rise.

The forecast says that Kuwaiti growth will come in at 3.1% in 2021, representing a fairly bleak macroeconomic outlook for the country, given that the economy is set to contract by 5.5% in 2020, according to Fitch Solutions.

Recovery momentum in the second half of 2020 and 2021 will be particularly weak across the non-oil sector. Non-oil activity collapsed in the first half of 2020, in line with the implementation of most coronavirus-induced lockdown measures including to a 24-hour curfew in April. While full data for first half of 2020 is yet to be released, point of sales transactions plummeted in the second quarter of 2020, reflecting the depth of the disruptions to non-oil activity.

Most COVID-19 restrictions were eased in late second quarter of 2020 and early third quarter. The Google Community Mobility index suggests that non-oil activity was gradually returning to normal in the third quarter of 2020. Although he point of sales data for this period is yet to be released, Fitch Solutions believe it will reflect an uptick in transactions.

Nevertheless, it is expected that the recovery will be held back by tight fiscal policy. Despite colossal fiscal buffers, low oil prices and the current gridlock between the cabinet and parliament – rendering the government unable to issue debt, even to cover upcoming maturities – will prompt the implementation of austerity measures.

Let us catch you up with the politics for a minute, so you can get the full picture.

Low oil prices and COVID-19 have strained Kuwait’s governmental finances and led to the rapid depletion of available cash reserves. One of the most pressing issues facing Kuwait’s new Emir Sheikh Nawaf al-Ahmad al-Sabah, who took power following the death of the country’s ruler in September, is the task of overcoming gridlock on debt legislation to tackle the liquidity crisis.

The Kuwaiti parliament, which is one of the most outspoken parliaments in the region, has repeatedly blocked the bill that would allow Kuwait to tap international debt markets. Kuwait is due to hold parliamentary elections on December 5, until then policymakers are kept at the edge of their seats.

Beyond the 5% VAT, which is expected to be introduced in April 2021, fiscal adjustments are likely to include excise taxes and cuts to subsidies and benefits. This will hit business sentiment and erode households’ purchasing power in the months ahead.

Furthermore, while we are about to witness a nationwide lockdown similar to that of the second quarter of 2020, Fitch Solutions expect that a persistently high number of COVID-19 cases will prevent the further easing of restrictions. Current case numbers are getting closer to May peak levels, and the government is reluctant to remove current restrictions, including a ban on social gatherings. The report predicts that restrictions will remain in place in the quarters ahead, given the increasing likelihood of a second wave of COVID-19.

What will happen to oil?

Oil accounts for more than half of Kuwait’s total GDP and will therefore be integral in supporting the recovery. Crude output volumes declined by 18.3% y-o-y between May – the start date of the OPEC+ supply restrictions – and August. Fitch Solutions has a dedicated Oil & Gas team, and they expect that output will fall by 11.4% over 2020 as a whole.

Production will rise in 2021, providing a boost to the economy. OPEC+ supply restrictions are set to ease in January 2021 as the global economy recovers and energy demand picks up again. Kuwait’s oil output will rise by 4.7%, driving much of the growth in 2021.

Finally, we note that risks are currently tilted to the downside. Our forecasts hinge on two assumptions which, in the event they do not materialise, would prompt us to revise down our forecasts. In conclusion, a number of developed markets have announced tighter social distancing restrictions in response to a surge of COVID-19 cases.

We do not currently expect Kuwait will opt for a full national lockdown as in Q220. Should the infection rate rise further however, this could prompt a full lockdown that would have negative implications for the economic recovery.

Fitch Solutions

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