Kuwait economy's growth one of the highest in the world

Global Investment House – Kuwait Economic & Strategic Outlook VIII- Gross Domestic Product - Preliminary results for 2004 indicated another year of exuberant growth for Kuwaiti economy primarily backed by high oil prices and increased oil production levels. Nominal GDP increased to KD16.4bn in 2004 as compared to KD13.8bn in 2003, a surge of 19.3%. At the same time, real GDP is estimated to have grown by 8.52% to KD10.4bn. The large difference between the nominal and real growth rates signifies the effect of liquidity on the economy. However, real GDP growth is still one of the highest in the world. This is the second consecutive year of oil price-led high growth in the country, as in the case of other GCC countries.

Excellent growth estimated for 2005

It is expected that the same trend of growth would prevail in 2005 too, thanks to oil prices and production levels being on their upward trend. Moreover, the monetary policy has remained accommodative, positively promoting business environment and stimulating consumer spending, with abundant liquidity and controlled inflation reinforcing the stance. CBK has already acknowledged the robust state of the economy by raising interest rates five times so far in 2005 to 6% and is expected to remain at the same level till the end of 2005. We believe that the robust economic conditions and increased private spending as well as a strong pick up in gross fixed capital formation driven by several capital projects should help the economy to achieve double digit growth rate. Similarly, the recent trend of rising export volumes during the 1H05 offsetting imports suggests an additional positive contribution of net trade to GDP. We expect nominal and real GDP to grow by 19.1% and 9.11% respectively in 2005.

Nominal GDP growth rate (2000-05)

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Source: Central Bank of Kuwait

Per capita GDP third highest within GCC

Tremendous growth in the last two years has boosted Kuwait’s per capita GDP to an all time high and the third highest within GCC behind Qatar and UAE. Growth in per capita GDP for 2004 was 10.3%, slightly below the previously observed highest growth rate of 12.9% in 2003. Moreover, GDP per-capita is expected to grow by 10.8% to US$22,625 in 2005 as GDP is expected to grow at 19.1% offsetting the expected population growth of 7.5%. Kuwait’s per capita GDP is relatively high, when considered in the global scenario, pointing at the high income levels of the people residing here.

GDP Per Capita (KD)

Source: Central Bank of Kuwait, Global estimates

Heavily reliant on the oil sector

‘Oil and Gas’ sector accounts for 47.6% of Kuwait’s GDP, which is high, even by the standards in GCC. Qatar is the only economy in the region to be more reliant on the oil sector. The output of this sector grew by 34.9% over that in 2003, which was in line with that in most of the countries in the region, thanks to the sky rocketing oil prices and sustained production levels. Strong economic growth in some industrialized nations, as well as China and India drove demand for crude to higher levels, thus limiting the spare capacity. Besides the effect of oil prices, contribution was also boosted by an increase in Kuwait’s oil production to an average of 2.34mn b/d in 2004 compared to 2.17mn b/d in the previous year. We believe that prevailing oil price level during 1H05 would assist its share in GDP to jump to at least 50% during 2005, a trend that is expected to prevail for 2006 as well.

Non-oil sector led by growth of the refining industry….

While the oil sector grew at abnormally high levels, the services-led non-oil sector too exhibited healthy growth trends, though led by refining. Following up on a growth of 10.8% in 2003, the non-oil sector further grew by 9.0% in 2004, illustrating that there is more to the Kuwait economy than oil. However, it should by noted that the growth was led by the ‘Refined products’ industry, an offshoot of the oil sector. The segment, which forms 4.8% of GDP, grew by 38.7% in 2004. Among the other non-oil sectors which showed marked improvement were financial institutions (15.3%), construction (8.4%) and trade (8.8%). The largest among the non-oil sectors, ‘Community and Social Services’, which contributed 17.6% to the GDP grew by just 5.4% in 2004.

Going forward, we expect more or less the same growth rate for the non-oil sector. However, we believe that instead of being heavily dependent on the ‘Refined products’ segment, non-oil sector growth would also be driven by sectors like ‘Transport, Storage and Communications’ and construction, thanks to the various ongoing projects. However, in general, it can be seen that oil and refined products would continue to have a major bearing on the growth of the economy.

GDP by sector at Current Prices

Source: Central Bank of Kuwait

Capital formation improves, though still comparatively low

The abundant oil resources-endowed economy in Kuwait historically threw up little need for major long term capital investments. However, oil revenues hitting the roof, changed the situation with the gross fixed capital formation (GFCF) growing by an exceptional CAGR of 28.0% in the period 2000-‘04. Capital formation started in a big way with a major spurt in 2002, before which it had an insignificant place in the economy. GFCF grew by 15.9% in 2004, much higher than the consumption expenditure for the year. Even after the high growth, GFCF forms just 14.2% of the GDP, relatively lower compared to the other GCC countries like UAE and Saudi Arabia.

Highly import dependent….

As in the case of the other GCC countries, Kuwait economy too is consumption led with private consumption spending and government consumption spending forming 37.8% and 21.0% respectively of the GDP.  Exports, which form 60.2% of the GDP is more or less limited to oil, while imports, which form 33.2% of GDP, is significant in satisfying the local demand for most of the manufactured goods. Though Kuwait has a substantial current account surplus, the import-intensity for the country can be understood from the fact that it forms more than four times its non-oil exports. This ratio between imports and non-oil exports is the highest after Lebanon among the countries in the MENA region. Growth in trade was robust in 2004 compared to the previous year with exports growing at 33.0% and imports growing at 10.9%.

GDP by Type of Expenditure 2003-2004

Source: Central Bank of Kuwait

A look at the first half trade figures for 2005 elicits an improved picture. The overall trade surplus has increased to KD3.85bn in the first half of 2005, almost double the corresponding trade surplus for the previous year. 65.6% growth of the exports led by oil exports and re-exports signifies the magnitude of value creation in the country, while at the same time, 21.9% growth of imports reflects the sustenance of the robust demand. These serve enough pointers to reaffirm our optimistic 2005 projections.

Gross Domestic Product