K Kuwait Economic Report September 2013 Department شركة الكويت والشرق األوسط لإلستثمارالمالي ش.م.ك.م Kuwait and Middle East Financial Investment Company K.S.C.C
September 2013 TABLE OF CONTENTS INTRODUCTION... 3 KUWAIT GDP OVERVIEW... 3 GDP COMPONENTS... 4 INFLATION... 5 COMMERCIAL BANK PRIME LENDING... 6 CENTRAL BANK RESERVES... 6 MONETARY POLICY... 6 GOVERNMENT REVENUE... 7 PUBLIC FINANCE... 7 GROSS PUBLIC DEBT AS PERCENTAGE OF GDP... 8 Kuwait Economic Report P a g e 2
Million USD September 2013 Introduction Kuwait is an oil-based economy with strong government control over major economic activities. Kuwait plays a leading role in OPEC. Based on OPEC s annual report 2012, Kuwait possesses 7% of the world's proven crude oil reserves accounting for101.5 billion barrels. Kuwait ranks as the world s seventh crude oil exporter and the world s sixth crude oil producer, producing almost 3 million barrel a day, about 4% of the world crude oil production. As in 2012, the petroleum sector accounted for 62% of GDP, more than 90% of Government revenues, and more than 94% of Kuwait s total exports. Kuwait's economy benefited greatly from the drastic rise in oil prices throughout the years that contributed to the consecutive budget surplus for the past thirteen years. With oil prices high over the past few years, Kuwait has made substantial fiscal and structural progress but remains somewhat vulnerable to fluctuations in global energy markets if dependency on the energy sector is not reduced and substituted by non-oil industries, threats could emerge to long-term economic sustainability. Despite efforts by the government to diversify, oil exports remain the backbone of Kuwait s economy. Kuwait GDP overview Kuwait s GDP has recorded substantial growth over the last two years largely boosted by oil sector revenues and investments in non-oil sectors of the economy. This can be attributed to the increased per capita income levels and accelerated public and private investment. Owing to the global financial crisis however, Kuwait s GDP declined by approximately 26.5% in 2009, reaching USD 109.5 billion. It recovered thereafter, growing by 31% YoY in 2011 to USD 159.2 billion. Figure1- Kuwait GDP at current prices 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000-2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GDP at Current Market Prices Growth% Source: Arab Monetary Fund, 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Kuwait Economic Report P a g e 3
Million USD September 2013 GDP Components Mining and quarrying contributed the most to GDP and stood at USD 98.9 billion in 2011, up by 51.3% YoY. It mainly consisted of crude petroleum and natural Gas. Between 2003 and 2008, the sector has recorded substantial growth at CAGR 35.2% boosted by oil prices. Owing to the global financial crisis however, the sector declined by approximately 43.8% in 2009, reaching USD 49.5 billion. Figure2 -GDP breakdown as per economic activity 2011 3.4% 2.4% 5.5% 3.5% 1.7% 1.3% 4.5% 0.2% 0.4% Agriculture, Fishing and forestry 17.5% 59.7% Source: Arab Monetray Fund, Mining, Quarrying and fuel Manufacturing Industries Electricity, Water & gas Construction Commerce, rest.& hotels Transport & Storage Finance, Insurance & Banking Housing Government & other Services Net Indirect Taxes Government services had the second highest contribution to GDP in 2011, recording 17.5%. Transport & Storage, the third highest contributor to GDP in 2011 saw a growth of 7%. Between 2009 and 2011, the non-oil sector grew at CAGR of 5.6%, with Government services recording the highest CAGR of 25.8% followed by Electricity, Water & Gas at CAGR of 20.3% and is also the economic activity that expanded the most in 2011 after Mining, Quarrying and fuel (up by 16.7% YoY). Construction sector came third at a CAGR of 16.9%. In 2010 however, Finance, Insurance & Banking sector witnessed a significant decline by 56.3% compared to previous year. This was mainly on account of the poor credit conditions that weakened after the global economic crisis in Kuwait during 2009 and 2010 that has also contributed to a decline in the stock markets and the value of investments. Figure 3- GDP breakdown as per economic activity 160,000 Net Indirect Taxes 140,000 Transport & Storage 120,000 Government & other Services Housing 100,000 Finance, Insurance & Banking 80,000 Commerce, rest.& hotels 60,000 Construction 40,000 Electricity, Water & gas 20,000 Manufacturing Industries - Mining, Quarrying and fuel Agriculture, Fishing and forestry Source: Arab Monetray Fund, Kuwait Economic Report P a g e 4
September 2013 Inflation Kuwait s inflation rate witnessed an Figure4- Kuwait Inflation rate upward trend, increasing from 3.6% 10% 9.0% in 2006 to 9% in 2008. In 2009, Kuwait s reported inflation rate 8% 7.5% declined to 1.2%. This decline was 6% expected on account of the declining 4.7% trend of oil prices and the financial 4% 3.6% 4.0% 2.9% crisis. The inflation rate increased in 2% 2010 & 2011 to reach 4% and 1.2% 0% 4.7% respectively. The high inflation 2006 2007 2008 2009 2010 2011 2012 rates throughout 2010 and 2011 Source: IMF, are primarily on account of high commodity prices. In 2012, Kuwait scored the second highest inflation rate among GCC Countries at 2.9%. Figure5- GCC Countries Inflation rate-2012 Bahrain 4.2% United Arab Emirates 3.5% 2.8% 2.1% 1.4% 2.6% 2.9% Kuwait 1.1% 0.7% 0.0% 3.7% Saudi Arabia 1.9% 2.9% Oman Source: IMF, Qatar Kuwait Economic Report P a g e 5
Million USD Million USD September 2013 Commercial Bank Prime lending According to EIU, Kuwait interest rates will broadly track the trend in US rates, 5% largely because the dinar is pegged to a 4.4% dollar dominated basket of currencies. 4% 3.8% 4.0% The dinar will depreciate slightly against 3% the dollar up to 2016, based on EIU 2.4% data, Kuwait rates are forecast to stay 2% largely unchanged until the Federal 1% Reserve starts to tighten policy in mid- 2015. The commercial bank Prime 0% lending rate on Kuwait deposits has generally been on the decline since Source: Central bank of Kuwait, 2008; Deposits interest rate as of 2012 is 1.6% compared to 1.7% in 2011. Figure 6 - Commercial banks Prime lending rate 1.9% 1.7% 1.6% 2006 2007 2008 2009 2010 2011 2012 Central bank Reserves Kuwait Central Bank s net international reserves have been showing a relatively moderate growth at a compound annual growth rate (CAGR) of 11.4% over the period 2008-2012, approaching USD 24.18 billion in FY2012 (up 2.4% YoY). The biggest spike was seen in 2011 when central bank reserves grew 32.3%. Figure7- Reserves of Foreign Exchange and Gold 25,000 20,000 15,000 10,000 5,000 0 2006 2007 2008 2009 2010 2011 2012 Source: Central bank of Kuwait, Monetary Policy Money Supply in its broad definition (M2) increased by US 5.29 billion or 5.3% to US 104.8 billion at the end of 2012, against US 99.5 billion at the end of the previous year. This growth is mainly triggered by the increase in sight deposits which added US 3.5 billion and Quasi-Money that has experienced an increase by US 1.4 billion. The upward movement in money supply (M2) Figure 8- Money Supply (M2) 120,000 90,000 60,000 30,000 0 2006 2007 2008 2009 2010 2011 2012 Money supply M2 Expon. (Money supply M2) Source: Central bank of Kuwait, Kuwait Economic Report P a g e 6
Million USD September 2013 throughout the past years gives a relatively positive sign of the improved liquidity in the banking system. Government Revenue In 2011, Kuwait has experienced a 42.6% YoY increase in government budget revenue, the highest in five years, which has led to higher budget expenditures, particularly wage hikes for many public sector employees. For the fiscal year 2012/2013, the budget projects revenues at USD 49.42 billion (KWD 13.9 billion) less than half of actual recorded revenue of USD 108.4 billion in the fiscal year 2011/2012. Public Finance Figure 9- Kuwait Government Budget 120,000 100,000 80,000 60,000 40,000 20,000 0 2008 2009 2010 2011 2012 E Government Revenue Government Expenditures Source: Central Bank of Kuwait, Kuwait experienced thirteen consecutive years of fiscal surpluses till fiscal years of 2011/2012; the fiscal surplus in 2011 has reached about 30% of GDP. Kuwait, the world s Seventh-largest crude oil exporter, booked a budget surplus of US 47.4 billion in the fiscal year 2011/2012 compared to US 18.7 billion in 2010/2011. Kuwait budget, which starts on April 1 st of 2012 was delayed due to ongoing political crises, Kuwait has projected a deficit of US 25.9 billion for the fiscal year 2012/2013. This projection is of course based on the assumed oil price for budget calculation, which is usually way lower than actual current price. International Monetary Fund warns that by as early as 2017, the government expenditure will exhaust all oil revenues which means no portion of these revenues would be saved for future generation. Kuwait Economic Report P a g e 7
September 2013 Gross Public debt as percentage of GDP Kuwait recorded a Government Debt to Figure 10- Public Debt as a percentage of GDP GDP ratio of 8.1% in 2011. Kuwait 14% Government Debt to GDP fluctuated 12% from 2006 until 2011, reaching an alltime high of 11.8% in 2007 and a 10% 8% record low of 8.1% in 2011. Kuwait's 6% low debt-to-gdp ratio indicates that the 4% economy s large number of services 2% and profits are high enough to pay back 0% its debts. According to IMF, Kuwait in 2006 2007 2008 2009 2010 2011 Source: International Monetary Fund, 2011 reported the lowest Gross government debt among its GCC peers after Saudi Arabia and the Sultanate of Oman. Kuwait Economic Report P a g e 8
September 2013 This report is being provided for informational purposes only and on the condition that it will not form a primary basis for any investment decision. This report is not an offer to buy or sell any of the securities that may be referred to herein. In no event will KMEFIC be liable for any loss occurring from investment decisions made based on the recommendation here-enclosed. Past performance is not necessarily a guide to future performance. Investors should make their own decision on whether or not to buy or sell the securities covered herein based upon their specific investment goals and in consultation with their financial advisor. KMEFIC has no obligation to update, modify or amend this report or to otherwise make any notification or announcement thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The inclusion of any opinions/estimates does not necessarily imply a recommendation or endorse the views expressed within them. Many areas of the report contain opinions and/or analysis that represent the involved analysts' views; neither the analysts nor KMEFIC shall be in any way liable for their opinions expressed in the report. KMEFIC may or may not have ownership or interest in companies mentioned in this report. This report has been prepared and issued by the Research Department @ Kuwait & Middle East Financial Investment Co. K.S.C.C. (KMEFIC), a licensed Kuwaiti investment company regulated by the Central Bank of Kuwait and the Capital Markets Authority. KMEFIC prepared this report using publicly available information, internal data, and other sources considered reliable; however, KMEFIC makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability with respect to the report or the information, analysis, opinions, or related graphics contained on the report for any purpose. While great care has been taken to ensure that the facts stated are accurate, neither KMEFIC nor any of its employees shall be in any way responsible for the contents. Neither this document nor any of its contents may be distributed in any jurisdiction where its distribution is restricted by law. Neither this document nor its content may be copied, transmitted or distributed without the prior written consent of KMEFIC. Additional information on the contents of this report is available on request. Kuwait Economic Report P a g e 9
September 2013 شركة الكويت والشرق األوسط لإلستثمار المالي ش.م.ك.م ص.ب: 819 الصفاة 13::9 الكويت هاتف : 22255::: )+965( فاكس : 22252563 )+965( Kuwait and Middle East Financial Investment Company K.S.C.C P.O.Box 819 Safat 13009 Kuwait Telephone: (+965) 22255000 Fax: (+965) 22252563 research@kmefic.com.kw www.kmefic.com.kw Kuwait Economic Report P a g e 10