Kuwait's economy expected to dip in 2023 on lower oil production

GDP is projected to rebound in 2024 as Opec+ production cuts unwind

Al Zour oil and gas terminal in Kuwait. The country's economic conditions are expected to remain positive, National Bank of Kuwait says. AFP
Powered by automated translation

Kuwait's economy is projected to decline in 2023 due to lower oil production, amid the country's commitment to additional Opec+ production cuts, a report has said.

Gross domestic product in Opec's fourth-biggest producer is forecast to drop by 0.7 per cent this year, National Bank of Kuwait said in its macro outlook report released on Saturday.

The production cuts will reduce Kuwait's full-year output by 4.3 per cent to an average of 2.6 million barrels per day.

However, the curbs are scheduled to end in 2024 and this would drive both the oil sector and total GDP up 3.3 per cent next year, the bank said.

"Economic conditions are expected to remain positive over the forecast period, with consumer activity constructive, government fiscal policy expansionary amid elevated oil prices and inflation easing," it said.

"GDP growth will also be boosted in 2024 from additional crude supply following the unwinding of voluntary Opec+ production cuts.

"The challenge remains to extend near-term gains into sustainable, long-term improvements to the public finances and economic diversification."

Kuwait in July said it was aiming to raise its oil production capacity to 3.15 million barrels per day, from the current 2.7 million bpd, within the next four years.

Kuwaiti Oil Minister Saad Al Barrak last month said the global oil market is moving on the right path towards balanced supply and demand.

The non-oil economy, meanwhile, remains "solid" in Kuwait, with a forecast growth of 3 per cent in 2023, compared to an estimated 3.2 per cent rise in 2022, on the back of buoyant private and expanding government consumption, supported by elevated oil prices, NBK said.

"Key indicators of non-oil activity, such as consumer cards spending, real estate sales and household credit, have been trending downwards in annual growth terms since peaking in 2022. "This has taken place amid tighter monetary conditions and softer global economic growth," it said.

"Looking ahead, we expect non-oil GDP to grow at a similar rate in 2024 on broadly constructive consumer spending, an uptick in household lending growth and still high oil prices. The economy may also benefit from continuing post-pandemic expatriate inflows to ease labour shortages and drive projects activity."

Inflation, meanwhile, is likely to ease in 2024, having ranged at about 3.7 per cent for most of 2023, likely reflecting a combination of ongoing strength in consumer demand, rising housing rents and lingering supply chain issues, NBK said.

"These dynamics are expected to lessen in 2024, helping to bring inflation down to 2.5 per cent on average," it said.

Kuwait's has benefitted from high oil prices as its economic recovery continues, and its fiscal and external balances have strengthened, according to the International Monetary Fund.

While inflation has been contained and external buffers are increasing, structural challenges persist, it said.

"The dominance of oil in Kuwait’s economy coupled with global decarbonisation trends underscore the urgency for economic diversification and structural transformation, and the pursuit of fiscal reforms to reinforce sustainability," the IMF said.

Oil prices, meanwhile, finished the week strong on Friday with both Brent and West Texas Intermediate gaining more than 4 per cent, but still posted a fourth straight week decline as growing crude demand concerns offset prospects of tighter supply.

NBK's economic projection is also in line with the IMF's projection for a 0.6 per cent decline in 2023.

Kuwait's public finances have improved amid higher oil prices and generally keener spending oversight, NBK said.

The bank expects a surplus of 11.8 per cent of GDP in fiscal 2022-2023, the country's first since 2014, but would then fall back to a deficit of 3.6 per cent of GDP, or 1.83 billion Kuwaiti dinars ($5.97 billion) in 2023-2024, given the record spending indicated in the government's budget, it said.

"Our deficit estimate is much narrower than the budget’s forecast of 6.2 per cent of GDP, given the historical tendency for spending to undershoot the budget and conservative official oil revenue assumptions. Next year, the deficit should narrow to 1.2 per cent of GDP on a moderate spending increase and still-high oil prices."

The overall near-term economic prospects are favourable, NBK said, pointing out that with private consumption remains robust, inflation is trending lower, and fiscal and external buffers are ample.

"Nevertheless, the economy remains exposed to oil price volatility, uncertain Opec+ oil production policy and disruptive domestic politics," it said.

Updated: November 18, 2023, 3:49 PM