Kuwait's growth is insulated from global slowdown: Dr Chami

KUWAIT: Dr Saade Chami, Group Chief Economist at National Bank of Kuwait spoke at a symposium organized by NBK and said that there is a synchronized slowdown in major economies, noting that the earlier revision of global growth to 3.5 percent in 2019 by the International Monetary Fund (IMF) is likely to be revised downwards again.

Dr. Chami highlighted that US growth is softening on fading tax cut impact and trade war fallout, adding that the latest job figures and real estate sector indicators are not encouraging, which may lead to a slower growth rate of less than 2.0 percent in 2019.

As for the Eurozone, Dr. Chami indicated that trade tensions and uncertainty surrounding Brexit will be a drag on growth; the European Central Bank (ECB) revised growth to 1.1 percent this year from 1.7 percent earlier.

He also mentioned that the Chinese government has lowered growth target to 6-6.5 percent this year, much lower than past growth readings on account of trade tensions and the failure of stimulus measures to lift growth up.

GCC Economic Outlook
Dr. Chami added that besides some financial sector linkages, global economic conditions affect the region mainly through two important channels: interest rates and oil price, both are expected to remain stable in the short term. GCC growth is expected at around 2 percent in 2019, driven mainly by public spending. In the meantime, Non-oil growth is seen at 2.5-3 percent, while oil sector growth is expected to be marginal due to production cuts. On the other hand, with moderate oil prices, the external current account of GCC countries taken together will register a large though less than surpluses registered in past years.

Dr. Chami noted that most GCC countries currently have more relaxed fiscal policies, which would lead to widening the budget deficits and subsequently higher public debt on oil prices remaining moderate and given that a large part of public debt is maturing is maturing this year.

According to preliminary estimates, GCC debt issues could reach about $50 -60 billion this year, but could vary with oil prices. Saudi Arabia is expected to be the largest borrower in 2019 with about $30 billion, although with the latest sale of part of SABIC to ARAMCO in the amount of $70 billion, the need to borrow will likely be less.

Dr. Chami added that Oman and Bahrain could tap the sukuk and bond market to finance their deficits, noting that Bahrain's borrowing needs are lower owing to the GCC financial support, and the fiscal measures taken lately. Meanwhile, Oman will face higher borrowing costs as a result of its credit rating downgrade.

Generally, debt to GDP ratios remains moderate in most GCC countries and there is no reason for concerns in the short/medium term.

Kuwait's growth
Dr. Chami said that Kuwait's economic performance is somewhat insulated from the global slowdown, noting that non-oil growth is seen at about 2.5-2.8 percent in 2019-20, helped by expansionary fiscal policy and prudent monetary policy. He expected oil GDP growth to remain flat due to Kuwait's compliance to OPEC output cuts, with production averaging 2.7 mb/d, with expected headline growth at about 1.5-2 percent in 2019-20.

Dr. Chami explained that the consumer sector is performing well, supported by low inflation, high employment, low interest rates and the CBK recent measures loosening consumer loan limits. Credit growth set to remain healthy this year and it grew by 5 percent in January. The real estate sector is also recovering after falling in 2015-16 on drop in oil prices, as the sales rose 56 percent last year with strong support from the residential sector.

Stressing on the role of monetary policy in supporting growth, Dr. Chami mentioned that CBK followed a slower pace in hiking its key interest rates compared to US Federal Reserve and other GCC countries and the. CBK opted to maintain relatively lower rates to boost credit growth and support non-oil sector by encouraging consumer spending and investments. As such, the CBK successfully mitigated the effects of the Fed's tight policy, thus shielding domestic interest rates and private sector activities in general, benefiting also from an exchange rate system that pegs the Kuwaiti Dinar to a basket of international currencies rather than being tied to the US dollar alone.

Meanwhile, fiscal balance improved in FY18/19 compared to the budget on higher oil prices and lower spending, providing space for spending hikes in FY19/20. Moreover, the draft budget for FY19/20 outlines a solid 5 percent rise in spending, with capex maintained at a decent level. It is expected that deficit could be 5 percent of GDP before transfers to the Future Generations Fund (FGF) and about 8 percent of GDP after this transfer, excluding investment income on financial savings. Additionally, project spending is expected to pick up as many projects in the pipeline including in housing, oil and petrochemical sectors.

Dr. Chami confirmed that debt levels remain very low, noting that no debt issuance is expected until the parliament approves the debt law. He also added that even if the draft debt law is approved, it is unlikely that Kuwait will issue any large debt this year, if at all.

While the economic condition looks fairly solid, nonetheless there are some challenges on the horizon, including low Capex spending; drop in oil prices; investors perception of the business environment; and in the absence of reforms, declining GRF reserves in case budget deficits continue in the medium.

Finally, Dr. Chami concluded by saying that Kuwait enjoys one of the highest credit ratings at AA, reflecting substantial hydrocarbon reserves and abundant financial savings in the FGF, one of the first SWFs in the world. This attests to the farsightedness and vision of Kuwaiti leaders who established that fund and continued to add to it through regular transfers and to refrain from drawing on it even in the most difficult circumstances.