SICO Research October 31, 2017 : Kuwait s Economic & Fiscal position October 2017 Kuwait s economic growth may take another downturn in 2017, likely registering at the best case flat growth over last year, or at the worst case, a contraction, according to IMF estimates Kuwait has recorded a budget deficit of KWD 1.9bn in the first 5 months of the current fiscal year (accounting for 2 of total planned deficit). Key investment projects underway for Kuwait 20 estimated at a total of KWD 8bn, are expected to stimulate medium term economic growth. Kuwait s Economic Growth: Likely to pickup but remains uncertain in 2017 Over the last few years Kuwait has lagged behind its GCC peers in terms of economic growth, particularly from (20122015). The average real GDP growth rate in Kuwait (20122016) reached 2. compared to an average for its GCC peers during the same period. However, amid economic slowdown in the GCC, Kuwait s economic growth picked up and regained momentum in 2016 supported by infrastructure investment which is fostered by its development program (Kuwait s second development plan KDP was approved in early 2015, following the first which was partially implemented). According to Kuwait s Central Statistical Bureau (KCSB), in 2016 (FY 2016/2017) Kuwait s real GDP growth reached 3. while the average real GDP growth rate of GCC members (excluding Kuwait) stood at 2.. Exhibit 1: Kuwait s real GDP growth vs. the GCC average growth 7. GCC average excluding Kuwait Kuwait 5. 3. Kuwait s economy remains largely dependent on oil, with oil GDP accounting for 53% of its total GDP. 47% oil GDP Source: KCSB nonoil GDP Sumaya Ali AlJazeeri Tel: +973 175100 (Ext.63) Sumaya.ali@sicobahrain.com www.sicobahrain.com 53% 1. 1. 2012 2013 2014 2015 2016 2017f 2018f 2019f 2020f 3. Note: Red dotted line points to potential decline in Kuwait s real GDP growth according to IMF forecasts and estimates for 2016 actual growth; Grey line points to growth forecasts by the IMF compared to actual GDP figure for 2016 published by the KCSB; GCC average based on WEO GDP figures, Kuwait real GDP from 2012 2016 based on published figures by the KSCS. Source: Kuwait s Central Statistical Bureau (KCSB), IMF WEO October 2017 data, SICO Research Kuwait s economic growth was boosted by both oil and nonoil GDP growth, of +2.3% and +2. in 2016 respectively. Note: Kuwait s economic and fiscal reporting is based on its fiscal years which run from April March end. For simplicity reasons we will be referring to FY2016/17 (From April 2016March 2017) as 2016. Nonetheless, Kuwait s economic growth may take downturn in 2017 oil production cuts, in line with the OPEC agreement which implies an 8.3% decline in production from 2016 levels (according to Fitch Ratings and the IMF). This will largely impact Kuwait s oil GDP growth (which accounts for 53% of total GDP). According to IMF estimates, Kuwait s real GDP will decline reaching 2.1% in 2017. (Note: real GDP figures reported for 2016 between the IMF and the KCSB differ). Considering Kuwait s reported real GDP figures for 2016 and comparing it to the IMF s real GDP forecasts for 2017, real GDP growth is flat. Meanwhile, Fitch projects a steeper decline of 3. in Kuwait s real GDP in 2017 (mainly due to lower oil GDP). SICO 2017 All Rights Reserved Attention is drawn to the disclaimer and other information on Page 7
SICO RESEARCH However, nonoil GDP growth is expected to remain resilient and stimulated by the government s increasing focus on infrastructure development. In the past, Kuwait has struggled to get its key infrastructure projects off the ground despite its vast oil wealth, and strong fiscal and financial buffers mainly due to political and regulatory impediments. Hence, medium term economic growth is contingent on the actual implementation of the investment projects planned in the KDP based on the Kuwait 20 vision. Earlier this year, Kuwait launched its New Kuwait 20 vision listing the plan for developing and modernising the country s infrastructure with key projects worth USD 27.6bn (nearly KWD 8bn See below exhibit), i.e. 2 of GDP. Among the key projects included in the KDP, a new metro rail network for Kuwait City, rail network to connect with other GCC members and the extension of the of the Kuwait Airport. Exhibit 2: Key Infrastructure Projects New Kuwait: Kuwait 20 Key Projects Description Estimated annual cost (KWDmn) Kuwait International Airport expansion terminal 2 Sh. Jaber Causeway Estimated total cost (KWDmn) Estimated year of completion % completed Airport expansion: capacity 11mn travelers 1,413 2022 1% Consists of two sections: One of the longest sea bridges in the world, with two sections: the main bridge (Sh. Jaber Al Ahmad bridge) is 36km long; and Sh. Jaber Al Ahmad al Doha section is 12.4km long 217 938 2018 7 National Museums Construction and investment in 14 museums Nm Nm Nm Nm Power plant/grid expansion IPO of electricity power plan (North AlZur) in Nm Nm Nm Nm 2017 5 float; increase electricity generation capacity to 2910 MW, increase water generation capacity to 6mn gallons. Kuwait metro Completion target 2018 Nm 3,460 2019 11% Petrochemicals complex Invest in establishing a comprehensive Nm Nm Nm Nm petrochem complex Oil and gas Increase oil production capacity to 4mnbpd Nm Nm Nm Nm by 20 Free trade area Establish a free trade area Nm Nm Nm Nm Housing Hand over 12,000 housing units annually over the next 3 years Mubarak Al Kabeer Port Building a port with a capacity of 24 quays, 7 991 2019 5 and 1.8mn containers Regional Highway Development of the northern regional 36 274 2020 87% highway linking Al Abdeli border with Iraq Railway Network Linking Southern Kuwait to Northern Nm 923 2018 11% Kuwait Note: Nm not mentioned Source: SICO Research, Kuwait Budget Announcement Ministry of Finance, New Kuwait Government Website Project Financing is not a concern despite deficits Although Kuwait is projected to record another deficit for the third consecutive year, it remains comfortable with large fiscal and financial buffers in addition to low debt levels. Kuwait s budgeted deficit is expected to reach KWD 7.9bn (after deducting the FGR future generations reserve allocation; see Note below Exhibit 3) for the current fiscal year FY17/18 (beginning April 1, 2017 March 31, 2018). Deficit financing is expected to be via domestic and external borrowing mainly, and possible withdrawal from their reserve fund. To date, Kuwait has recorded a deficit of KWD 1.9bn in the first 5 months of the current fiscal year (accounting for 2 of total planned deficit). Note: Kuwait s total expenditure (excluding the FGR allocation) during this period reached KWD 8.3mn, of which KWD 1.52bn in commitments for expenditure. Total capex during this period reached KWD 527.3mn, out of KWD 2.9bn planned for the whole fiscal year. The bulk of this expenditure is likely related to the annual costs of the current key projects underway (see Exhibit 2). 2
SICO RESEARCH Exhibit 3: Kuwait s Public Finances in KWDmn Public Finances FY 15/16 FY 16/17 FY 17/18 YTD* FY16/17b FY17/18b Total Revenues 13,634 13, 7,0 10,238 13,344 Total Expenditures exc. commitment to FGR 18,246 17,708 8,270 18,892 19,0 Future generation reserve ( of revenue) 1,363 1,310 703 1,024 1,334 Actual total expenditure including FGR allocation 19,609 19,018 8,973 19,916 21,234 Budget Surplus/Deficit including FGR allocation (5,975) (5,918) (1,943) (9,678) (7,8) (after deducting FGR) Budget Surplus/ Deficit excluding FGR allocation (before deducting FGR) (4,612) (4,608) (1,2) (8,654) (6,6) Note: * FY17/18 public finances to date (from April 1, 2017 September, 2017); budgeted figures may vary from the final approved budget for the years FY15/16 (as changes are made by parliament). FY17/18 budgeted figures are the final approved budgeted figures by parliament, after changes. FGR allocation: is at least of total revenues; the government considers it as an expenditure hence it is included in the Actual total expenditure line. Kuwait s budget for FY17/18 is based on an oil price of USD /bbl. Source: SICO Research In the last fiscal year FY16/17, Kuwait met its financing needs by issuing around KWD 2.2bn of net new local debt, USD 8bn of Eurobonds and taking around USD 4bn from the general reserve fund. Financing streams for FY 17/18 will likely be similar to last year s financing means. The government is awaiting the approval of increasing the external borrowing cap by parliament to be able to rely more on debt issuance vs. withdrawing from its reserves. Additionally, Kuwait will have to adjust key legal frameworks to enable it to issue Sukuk as an instrument for sovereign debt. Should these legal and regulatory challenges be overcome, this will translate into less reliance on the country s general reserve fund. Conclusion Kuwait s economy continues to be impacted by underspending on capital expenditure, while current expenditure continues to move in an upward trajectory. Although nonoil GDP growth has significantly decelerated over the past 5 years, it has picked up in FY16/17 reaching 2., and is projected to increase over the medium term amid higher government focus on infrastructure development. Banking Sector Summary: Kuwait s banking sector: August data by GCC central banks show Kuwait s banking sector as the second fastest growing YTD with its asset base growing by 5. YTD (annualized) driven by healthy loan growth +5. YTD while supported by a 3. YTD growth in deposits. As at August, Kuwait s LDR remains similar to August 2016 at 8. The increase in the banks asset base is mainly due to higher loans to the government, +4 YTD and 1 MoM. Loans to the private sector were flat on a YTD basis (MoM: +3%). September data: September data published by both Saudi Arabia and the UAE point to balance sheet growth in the UAE banking sector, with total assets increasing by 0.9% MoM compared to a marginal decline in total assets in Saudi banks (0.1% MoM), driven by a 0.7% MoM decline in loans and a 1. MoM decline in deposits. The UAE s banking sector saw marginal MoM increase in loans, while deposit growth was slightly stronger +0.9% MoM. Exhibit 4: GCC banking sector data (latest available as at October 2017) Asset Growth Lending Growth Deposits Growth Loans to Deposit Data as MoM YTD YoY MoM YTD YoY MoM YTD YoY Latest Last year of Bahrain Aug17 0.1% 0. 1. 0.3% 5. 3. 0.3% 2. 3. 5 49% Kuwait Aug17 0. 5. 5. 0. 5. 3. 0. 3. 2.9% 8 8 Oman Aug17 0.1% 2. 0. 0.3% 3.1% 3. 0.1% 4.7% 0.7% 107% 10 Qatar Aug17 1.1% 6. 13. 1. 10.9% 14. 2.7% 13. 20. 113% 119% KSA Aug17 0. 1.9% 3. 0.3% 1.9% 1. 0. 0. 2. 8 91% UAE Aug17 0. 0.3% 4. 1.1% 0. 1. 0. 1.9% 7. 93% 9 KSA Sep17 0.1% 1. 1. 0.7% 0. 1. 1. 1. 1.3% 8 9 UAE Sep17 0.9% 1. 3.7% 0.1% 0. 0. 0.9% 2. 5. 9 97% Note: YTD* is annualised. Bahrain has not reported any recent data. Source: SICO Research, Respective Central Banks 3
May12 Sep12 May13 Sep13 May14 Sep14 May15 Sep15 May16 Sep16 May17 May12 Sep12 May13 Sep13 May14 Sep14 May15 Sep15 May16 Sep16 May17 Sep17 May12 Sep12 May13 Sep13 May14 Sep14 May15 Sep15 May16 Sep16 May17 May12 Sep12 May13 Sep13 May14 Sep14 May15 Sep15 May16 Sep16 May17 SICO RESEARCH Exhibit 5: GCC Money Supply (M2) 28 26 24 22 20 18 1 1 1 115 105 95 85 1 1 44 39 34 29 24 19 2 1 170 1 1 70 5 0 4 4 3 2 3 2 1 3 3 2 2 1 Exhibit 6: GCC Banks: Assets 85 80 75 70 65 60 1 2 220 180 160 1 1 82 72 62 52 42 32 22 3 2 2 1 6 600 5 0 4 3 2 1 6 600 5 0 4 3 2 1 7 680 6 580 5 480 4 380 2 1 Exhibit 7: GCC Banks: Lending 23 21 19 2 1 1 2 2 1 17 15 80 15 1 5 4 3 2 3 1 2 1 4 3 1 1 1 Source: Respective Central bank 4
Jun12 Feb13 Feb14 Feb15 Feb16 Feb17 Jun12 Feb13 Feb14 Feb15 Feb16 Feb17 Jun12 Feb13 Feb14 Feb15 Feb16 Feb17 Jun12 Feb13 Feb14 Feb15 Feb16 Feb17 Nov12 Mar13 Nov13 Mar14 Nov14 Mar15 Nov15 Mar16 Nov16 Mar17 SICO RESEARCH Exhibit 8: GCC Deposits 2 2 1 160 1 1 1 1 3 2 2 1 2 1 1 6 5 4 3 2 0 4 3 2 1 4 3 1 Exhibit 9: GCC Leverage 20.0 Asset/ Equity [LHS] 6 Asset/ Equity [LHS] 9 10.0 15.0 6 7.5 8 5 10.0 8 5 4 6.5 7 5.0 5.0 4 7 4.0 Asset/ Equity [LHS] 1 10 10 9 9 8 8 9.5 8.5 7.5 6.5 Asset/ Equity [LHS] 13 12 11 10 9 8 8.5 7.5 6.5 Asset/ Equity [LHS] 9 9 8 8 7 7 11.0 10.0 5.0 Asset/Equity [LHS] 1 10 9 8 7 Exhibit 10: GCC Net Foreign Assets (USD bn) 2.0 1.5 1.0 0.5 0.0 0.5 1.0 1.5 2.0 2.5 20 15 10 4.0 2.0 0.0 2.0 4.0 10.0 10 0 10 20 65 60 10 5 0 5 10 60 15 Source: Respective Central bank 5
May14 Sep14 May15 Sep15 May16 Sep16 May17 Sep17 Feb14 Aug14 Feb15 Aug15 Feb16 Aug16 Feb17 Aug17 SICO RESEARCH Exhibit 11: Inflation (Based to Jan 9 = ) 1 115 105 104 102 98 96 94 92 117 116 115 114 113 112 111 112 108 106 104 102 134 132 1 128 126 124 122 114 112 108 106 104 102 Exhibit 12: 3M Interbank spread over 3M LIBOR (in %) 1. Not Available Not Available 1.20 0.80 0.60 0. 0.20 2. 2.00 1. 0. 1.80 1.60 1. 1.20 0.80 0.60 0. 0.20 1.20 0.80 0.60 0. 0.20 Note: 3 month Interbank rate minus 3 Month USD LIBOR Exhibit 13: GCC 5Year Sovereign CDS (in bps) Abu Dhabi Bahrain Dubai Abu Dhabi 5 Year CDS 0 Bahrain 5Y CDS 600 Dubai 5Y CDS 1 4 1 Qatar Saudi Arabia Qatar 5Y CDS KSA 5Y CDS 1 1 Source: Respective Central bank 6
SICO RESEARCH Contact Details NOTES BMB Centre, 1st Floor P.O Box 1331, Diplomatic Area Manama Kingdom of Bahrain Investment Research research@sicobahrain.com Nishit Lakhotia, CFA, CAIA Tel: (Direct): +973 175121 Brokerage Fadhel Makhlooq Tel: (Direct): +973 17515202 Visit us at www.sicobahrain.com Disclaimer This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. Nothing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related investments. Additional information on the contents of this report is available on request. Copyright Notice Securities and Investment Company 2017. This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part. 7