Kuwait

A very high dependence on the hydrocarbon sector and global oil prices has resulted in a regime of low and volatile GDP growth from 2013 to 2021. 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, 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. In 2020, Kuwait’s economy was hit hard by the double shock of the global Covid-19 crisis and the drop in oil prices at the time. Real GDP contracted by a hefty -8.9% in 2020, much stronger than the GCC average of -5.1%. And the recovery in 2021 was muted, with growth of just +1.3%, as the authorities tightened lockdown measures again in response to a renewed surge in Covid-19 cases amid an initially slow vaccine rollout in the country.

In 2022, the outlook has much improved. As OPEC+ has eased oil output cuts (especially compared to 2020), oil production in Kuwait rose by more than +10% y/y, which together with higher crude oil prices and surging natural gas prices has been boosting public and external finances. Moreover, bank lending accelerated as the Central Bank of Kuwait (CBK) pursued a looser monetary policy stance than the monetary authorities of its GCC neighbors – from January to November 2022, the CBK hiked interest rates by 150bps, compared to 350bps in Saudi Arabia, for example. We forecast annual real GDP to rise by around +8% in 2022. GDP growth is then projected to more than halve in 2023 since the increase in oil production should fade.

Inflationary risks will remain low overall. The Kuwaiti dinar (KWD, the local currency) is pegged to a basket of currencies dominated by the USD, 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 this to be maintained over the next two years, at least, despite occasional speculation about unpegging or devaluation. Consumer price inflation peaked at 4.7% y/y in April 2022 – much earlier than almost everywhere else amid the global surge in food and energy prices. It is forecast to average around 4% in 2022 and 3% in 2023.

The business climate in Kuwait is below average in our assessment of 185 economies. The World Bank’s annual Worldwide Governance Indicators surveys indicate 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 the 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.