KUWAIT: The Kuwaiti economy ended 2023 on a relatively positive note, with the final quarter of the year showing tentative signs of a turnaround in bank credit growth, real estate activity and stock market performance. Inflation finally ticked lower in December after being range-bound for most of the year. Sentiment was also hopeful, with His Highness the Amir Sheikh Mishal Al-Ahmad Al-Sabah taking the oath and appointing former Deputy Prime Minister and Minister of Foreign Affairs Dr Mohammad Al-Salem Al-Sabah as HH the Prime Minister to lead a new, predominantly technocratic government.

Q4 2023 was notable for a pick-up in the pace of legislation. Several laws were passed including to annul the local agent requirement for foreign companies, allowing foreign companies to participate in the bidding process for public tenders and penalizing owners of unused, so-called ‘white’ lands to free up land for residential housing. Measures with potentially positive fiscal implications were also proposed, including excise taxes on tobacco and sugary drinks (‘sin taxes’) and a 15 percent tax rate for multinational corporations. The latter follows Kuwait’s joining in November the OECD-BEPS inclusive framework against tax avoidance.

Non-oil activity

In terms of economic data, the Central Statistical Bureau (CSB) released national accounts figures after a three-year delay. These show that the non-oil economy was more resilient during the 2020 COVID-19 pandemic than originally thought, but that from 2021 onwards activity was less robust than inferred from the strong performance of associated, higher frequency metrics. The data showed non-oil GDP expanding 1.5 percent y/y in Q2 2023 after several quarters of negative growth. Growth in Q2 was driven by strong gains in the transportation (+35 percent y/y) and construction (+21 percent) sectors, with the latter reflecting the rebound seen in project awards in 2023.

Oil sector output, on the other hand, declined by -3.9 percent y/y as Kuwait lowered its crude production level as part of its voluntary participation in OPEC+ cuts. The negative performance of the weighty oil sector explains the 1.3 percent y/y contraction in overall GDP in Q2.

The CSB data also published revisions to the historical GDP series. These showed non-oil activity performing better than expected both in 2019 and in pandemic-affected 2020.

Looking ahead to 2024, additional oil sector cuts will likely keep headline growth flat to slightly negative, even as we expect the non-oil sector to post gains of over 3.0 percent, spurred on by refining gains and still growing private consumption.

Oil prices decline in Q4 despite

spike in geopolitical risk

Oil prices fell sharply in Q4 2023, with Kuwait Export Crude (KEC) ending the year at $79.6/bbl (-18.7 percent q/q; -3.3 percent y/y) and erasing most of Q3’s OPEC supply-curtailment gains.

While Q4 saw a spike in geopolitical risk in the aftermath of hostilities in Gaza in October, including subsequent Houthi rebel attacks on Red Sea shipping, the effect on oil prices was negligible. Markets weighed that there was enough idle global spare production capacity to offset any potential supply disruptions, especially amid weakening oil demand. KEC averaged $84.3/bbl (-16.7 percent y/y) in 2023, having traded at a premium to the usually more expensive physical Brent on the back of tighter medium sour crude fundamentals.

For 2024, we see KEC at $82/bbl on softer but still solid oil demand growth and supportive OPEC+ supply management. At November’s ministerial meeting, Kuwait agreed with the OPEC impulse to deepen and extend 2023’s voluntary production cuts into Q1 2024 and possibly longer to balance the market and prevent further oil stock builds. Kuwait’s output in Q1 2024 will therefore fall by 135 kb/dto 2.41 mb/d.

Consumer spending

Central bank card data showed consumer spending growth continuing to normalize post-pandemic. Total card spending grew 8.7 percent y/y in Q3 2023, similar to the 8.4 percent rise recorded in Q2 2023.

Looking to the year ahead, consumer spending faces headwinds including an uncertain global macroeconomic backdrop, lower year-on-year oil prices, heightened geopolitical risk and still-elevated global interest rates, though these are expected to begin easing in H2 2024. But the bulk of the slowdown in spending growth is likely behind us, with growth now more in line with historic trends after a post-pandemic surge. Moreover, consumer confidence could be boosted if the government tackles its economic agenda with renewed vigor.

Real estate activity

Q4 2023 saw the real estate sector post its best quarterly sales performance in more than two years, with sales rising 13.6 percent q/q to KD 771 million. Strong investment and commercial sector activity, the latter including sizable deals in Kuwait City and Al-Ahmadi governorates, as well as a less marked decline in residential sector sales were behind the improvement. Activity benefitted from the end of the summer lull and an expansion in credit to the real estate sector in the final months of the year. Cumulative sales of KD 2.8 billion in 2023 were still an acute 22 percent drop on 2022. Higher interest rates, pricier residential valuations and uncertain prospects were some of the factors at play.

Nevertheless, the government did provide some much-needed legislative clarity with its ‘white land law’ bill in November, with which it aims to free up the supply side by penalizing the practice of keeping lands idle for a prolonged period. This comes on the heels of the residential cities law, approved in July, which hopes to stimulate large-scale residential development and other key projects through private sector participation. The authorities also hope to shift more of the financing to the private sector to help reduce the fiscal burden. These laws could support supply in the medium-to-long term while demand could be boosted by passage of the draft mortgage law through parliament.

Project activity dips

Project award momentum slipped slightly in Q4 2023 with KD 621 million worth of projects being awarded, a drop of 9.6 percent q/q. This mainly reflects the high base of the previous quarter—a large one-off infrastructure award—since awarded contract values in absolute terms remain elevated by post-pandemic standards. Total awards in 2023 reached KD2.47 billion, an almost three-fold increase on the previous year and by some margin the best projects market performance since 2017. Last year’s strong performance was probably a reflection of the large backlog of pandemic-era projects finally coming alongside an unwinding in labor and material shortages.

Plans to expand the country’s oil, electricity and water production capacities with Al-Zour (phases 2&3) and Al-Khairan IWPPs, in particular, are set to top the priorities list going forward. Kuwait Petroleum Corporation also plans to invest $9-10 billion annually over the next five years to raise upstream oil and gas production capacity. For 2024, MEED projects has identified KD6.2 billion worth of projects awards that are up for sign-off.

Inflation rate moderates

Inflation softened in December, slowing to 3.4 percent y/y from 3.8 percent in November and 3.7 percent at end-Q3. The slowdown reflected moderating price rises in the food & beverages (4.7 percent y/y in December from a peak of 7.7 percent in April), housing (2.3 percent from 3.1 percent in November) and transport (2.4 percent from 3.0 percent in November) categories. Inflation accelerated, however, in the furnishings, education, health and recreation & culture categories, though not enough to positively influence the core rate, which fell slightly to 3.4 percent. Inflation averaged 3.6 percent in 2023 (vs. 4.0 percent in 2022) and is forecast to slow again in 2024 to 2.5 percent as food price and supply chain pressures ease further and consumer spending strength lessens.

Credit and deposits tick up as

weak 2023 draws to a close

Private credit to residents showed signs of improvement in Q4, with growth edging up to 1.5 percent YTD (+1.5 percent y/y) in November. Business credit was the primary driver (+1.8 percent YTD; +1.3 percent y/y), helped by the construction (+15.6 percent YTD) and trade (+8.3 percent YTD) sectors especially, while the real estate sector, the largest component of business credit, was up 2.6 percent YTD after being broadly flat-to-negative for most of 2023. Household credit, after being flat in H1 2023, showed further signs of a pick-up (+1.7 percent YTD; +2.1 percent y/y). Resident deposit growth also strengthened in Q4 (+2.9 percent YTD; +2.5 percent y/y). Recent momentum has largely been driven by growth in public institution deposits (+15 percent in Sep-Nov), though these were still down 2.1 percent YTD after declines earlier in 2023.

The CBK’s key discount rate ended the year at 4.25 percent, after a cumulative 275 bps increase since March 2022—around half of the US Fed’s 525 bps rise over the period. Attention now shifts to the pace of monetary loosening after the Fed signaled that its rate hiking cycle was all but complete. Fed dot-plots projections point to three, 25bps rate cuts in 2024; futures markets see five to six cuts.