Kuwait’s economic performance has been subdued over the past few years. Growth has been constrained by Opec-linked oil production cuts and, in the non-oil sector, normalising consumer spending following a post-Covid-19 surge. Activity has also had to operate against a background of tighter central bank monetary policy. 

Non-oil GDP growth averaged just 0.4% year on year (y/y) in the 2021-23 period, well below the pre-pandemic average of around 3%. 

Nevertheless, as we move through 2024, there are signs that activity has turned a corner. In Q1 2024, gains in manufacturing helped propel non-oil GDP growth to 4.7% y/y from -2.3% in the previous quarter. Real estate sales, household and business credit growth as well as projects activity are pointing in the right direction, and inflation fell to a post-pandemic low of 2.8% in June. 

Furthermore, in the months ahead households and businesses could benefit from a reduction in interest rates. Although volatility in the GDP data make forecasts difficult, strong non-oil growth in Q1 presents upside risks to our full-year forecast of 2.5%.

Meanwhile, output in the oil sector is expected to rise following the Opec+ decision to begin unwinding members’ 2024 voluntary crude production cuts from October. This should see the gradual return of 135,000 barrels a day (b/d) of Kuwaiti crude, bringing output back up to 2.55 million b/d by the end of next year and lifting oil GDP growth to 4% in 2025. 

In the fiscal year 2023/24, amid elevated expenditures (some of which related to one-off spending items) and lower oil prices, public finances flipped back into deficit, at KD1.6bn or 3.2% of GDP, from a surplus of KD6.4bn the previous year. 

Further deficits are likely in the medium term – the recently approved budget for 2024/25 projects a deficit of KD5.6bn. 

Government priorities

Following the suspension of parliament for up to four years in May, the new government has already pledged to put the public finances on a more sustainable footing, as well as implement much-needed supply-side reforms. At the time of writing, it has yet to set out specifics of its work plan for the coming years. But the long-term challenges facing Kuwait’s economy are well-known and the government need not reinvent the wheel when setting its priorities for the future.

We expect its focus to be on boosting investment and private sector-led economic growth, while simultaneously addressing the weak underlying fiscal position.

Investment plans

Investment has been a major weakness over the decades, with fixed investment as a share of GDP averaging just 19% between 2000-19, the lowest in the Gulf. Moreover, the government routinely fails to meet its own capex targets, with annual spending averaging 77% of budgeted amounts over the past decade. 

Weak investment has led to subpar overall growth outcomes and a growth model skewed too far towards consumption. However, addressing the bureaucratic and procedural blockages will inevitably take time. 

We expect the government to set out ambitious plans for developing key sectors such as housing, transport, utilities and tourism, as well as oil and gas. 

An earlier goal to develop the capacity to launch six public-private partnership projects a year is optimistic, but such project types will likely be a central part of the delivery process and successful initiation would help build credibility in the domestic market among both local and foreign investors. 

On the fiscal front, the challenges are perhaps even greater and more urgent. Addressing the structural deficit requires changes on multiple levels: controlling growth in the wage bill; refocusing spending towards investment, which accounted for only 7% of all outlays last year; and developing new revenue streams to reduce dependence upon oil. 

In our opinion, a move towards multi-year budget targets or even some type of fiscal rule (with built-in flexibility) could help in this process.

Finally, there is a need to rebuild short-term buffers by recapitalising the state’s treasury account, which has been depleted in recent years, and to approve a new debt law to facilitate government borrowing. 

The key question is the extent to which the above changes are now realistic and credible, following years of false starts and disappointment. While the challenges are complex and the government is new and untested, we see the urgency level as higher now with the performance gap widening compared with GCC peers and the administration incentivised to deliver under a changed political landscape.

In our view, the combination of more streamlined decision-making, strong executive support, more stable government and broad agreement about key reform areas gives Kuwait its best shot at serious progress in years – one that could propel it back up the GCC growth league.

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