Backed by comfortable oil reserves and a lower need for precautionary savings, the government of Kuwait’s expenditure is expected to reverse its historic counter-cyclical trend, in place since the 1990 invasion of Kuwait, and follow a pro-cyclical path in 2005/2006 and 2006/2007.
According to a research report by EFG-Hermes, the region’s leading full service investment bank, signs of this pro-cyclical trend have begun to emerge in the FY2005/2006 budget, which incorporates an 11% increase in expenditure compared to FY2004/2005. Moreover, the government has prepared the FY2005/06 budget using an average Kuwait Export Crude (KEC) price of USD21 per barrel, up by USD6 per barrel from the historic average of USD15 per barrel.
Hany Genena, Senior Economist at EFG-Hermes explained, “Having established a comfortable fiscal position and a lower need for precautionary savings with increased political stability, the Kuwaiti government is now geared up for a move from saving to investing for the first time since the 1990 invasion of Kuwait. In the coming years, we expect the government will continue to reverse its counter-cyclical stance as expenditure on upstream and infrastructure projects gains momentum, and geopolitical risks subside.”
The report also expects oil revenues to reach historic highs in 2005, with strong demand likely to sustain KEC prices above USD40 per barrel. The average spot price of KEC jumped 27% to USD41.4/B in the first half of 2005, while production remained at near full capacity, at 2.5 million barrels per day (MBD). Over the next three years, Kuwait is expected to de-bottleneck capacity constraints in the North fields by around 300,000- 400,000 barrels per day after the USD8.5 billion Project Kuwait is executed.
“The positive sentiment has been evident in the strong performance of the stock market and the negative spread between the overnight KIBOR and LIBOR. From 2 January 2005 until 16 June 2005, the KSE Index gained 34% compared to 22% in Bahrain, 50% in Qatar, 63% in KSA, 62% in Oman, and 102% in Abu Dhabi. Furthermore, to take advantage of the improvement in risk appetite, the government announced it will partially divest its stakes, held via Kuwait Investment Authority, in selected companies and financial institutions in 2005,” Genena notes in the report.
The report also indicates that in order to limit the build up of systemic risk in the banking system, the government has substituted its precautionary fiscal stance with a precautionary monetary stance. As at May 2005, the year-on-year growth in credit to the private sector decelerated to 13.1% as banks restrained credit growth so as to comply with the newly introduced 80% loan-to-deposit ratio.
Genena concluded, “Throughout the rest of 2005, we believe that the deceleration in loan growth will compound the effect of the Kuwaiti Dinar’s nominal effective appreciation on inflation and help reduce the Consumer Price Index inflation rate to around 2.7%, down from 3.0% in 2004.”
© 2005 Al Bawaba (www.albawaba.com)
