KUWAIT: Economic growth is set to remain robust, with strong demand underpinned by the ongoing property market expansion, solid performance by the financial sector, booming tourism, attractive foreign investment climate and capacity expansion initiatives in the hydrocarbon sector alongside renewables.

The non-oil sector grew a very solid 5.9 percent y/y in H1 2023, driven by tourism-related sectors, finance, trade, and logistics. The PMI gauge points to activity remaining strong since (despite disruptions to Red Sea trade), and we look for non-oil growth to reach a still impressive 4-5 percent in 2024-25, only slightly down on last year. Notably, credit growth (5.3 percent in 2023) has not been the main driving force behind non-oil growth post-pandemic, perhaps helping to extend the economic cycle in the face of high interest rates.

The government will continue to provide very active support for the business climate, reflecting commitment to its various diversification and development plans including UAE 2031 (doubling GDP in 10 years), Abu Dhabi 2030 (private sector-driven, knowledge-based economy) and D33 (dramatically expand Dubai’s trade and investment). The business impact of the introduction of corporation tax in mid-2023 so far seems to have been well absorbed, reflected in a region-leading gain in Dubai’s stock market last year (+22 percent).

In the near term, oil sector growth will be minimal with OPEC+ cuts rolled over in H2 2024, resulting in a mild decline in oil GDP this year then a modest rise (output at 2.96mb/d) in 2025. ADNOC’s crude oil production capacity reportedly increased 4 percent to 4.85mb/d at the end of 2023, leaving scope for rapid growth in future if global market conditions allow. Completion of the Crude Flexibility Project this year will allow the Ruwais refinery to process 420kb/d of heavier and sour feedstock while unlocking higher-value crude for export. Natural gas output is also being expanded under a plan to achieve gas self-sufficiency by 2030, including associated gas from higher oil output.

Property market shows resilience

After slowing earlier in 2023, indicators of real estate activity have reaccelerated, with residential prices and rents in Dubai for example up 20 percent y/y as of March 2024. Strong economic growth, a rising population and improved long-term residency and visa regulations are likely underpinning demand. Although the property market has proved highly durable, we still expect this buoyancy to fade over the forecast period as moderating economic growth, higher pricing and supply additions take a toll.

However, tighter real estate financing regulations versus previous cycles and relatively modest post-pandemic credit growth should limit the wider impact of any market correction. Meanwhile, CPI inflation is projected to pick up in 2024-25 to 2.5 percent on average from 1.6 percent in 2023, on strong domestic demand and an expected increase in fuel prices. Rising housing rents (which account for 35 percent of the CPI basket) will also be a supporting factor for inflation.

External positions

A combination of lower oil revenues and rising welfare spending (subsidies and social benefits) narrowed the fiscal surplus in 2023 to an estimated 4.6 percent of GDP, from 9.9 percent in 2022, despite the introduction of the 9 percent corporate income tax in mid-2023 (which it is estimated could eventually yield revenues of 1.5 percent of GDP per year).

We expect the budget surplus to continue declining to 3.5 percent in 2024-25 mainly on lower oil revenues. Strong non-oil growth and new revenue streams (non-oil revenues estimated at 38 percent of all revenues in 2024) will offset part of the expected increase in welfare and capital spending, given rise in the 2024 federal (+1.6 percent to AED63.1 billion) and Dubai (+17.2 percent to AED79.1 billion; +5.8 percent to AED83.7 billion in 2025) budgets. According to IMF figures, government debt will remain low by international standards at around 30 percent of GDP in 2024-25, though rising to around 55 percent once GRE debt is included.

Near-term fresh debt issuance is unlikely to be high given budget surpluses and elevated interest rates, but the federal government may issue more dirham-denominated debt to help develop domestic capital markets. The external finances meanwhile remain very comfortable with sizeable current account surpluses (7-8 percent of GDP in 2024-25), strong credit ratings (S&P: AA; Moody’s: Aa2) and sovereign wealth assets (ADIA & Mubadala) estimated at $1.07 trillion by the SWF Institute and central bank gross reserves of $190 billion in 2023.

Risks include oil prices

Strong economic growth and successful diversification are reducing the UAE economy’s exposure to oil shocks versus the past. Nevertheless, higher-than-forecast oil prices would still boost government finances and investment, while prospects would also be helped by a pick-up in global growth and/or rapid cuts in interest rates. A severe drop in oil prices, rising regional geopolitical tensions that hurt trade and regional supply chains, as well as a sharper-than-expected property market downturn are key downside risks.