Subdued oil prices and lower oil production led to slower overall economic growth in 2019, but robust public spending and credit growth are expected to underpin non-oil growth through the medium term. The steep downturn in oil prices since March and slower global growth spurred by the coronavirus will be absorbed by fiscal and financial buffers, at the expense of sustainability and diversification. This underscores the need for implementing fiscal and structural reforms to diversify away from hydrocarbons, support private sector activity and lay the foundations for a more sustainable growth model.
Real GDP growth slowed to an estimated 0.7% in 2019 from 1.2% in 2018 due to a contraction in oil output in line with the since-lapsed OPEC+ agreement. On the other hand, non-oil growth strengthened on the back of higher government and consumer spending. Capital market reforms and the inclusion of Kuwait equities in FTSE Russell and MSCI EM have led Kuwait to outperform its GCC peers.
The fiscal deficit is estimated to worsen from 3% of GDP in FY18/19 to 13.6% in FY19/20 (excluding investment income, and before transfers to the Future Generations Fund) driven by higher spending and lower oil revenues.
In the near-term non-oil GDP growth will be subdued by COVID-19 related domestic mitigation measures and trade disruption, as fears over the spread of the coronavirus continue to grow. The announced budget deficit for FY20/21 was KD 9.2 billion. However, the recent plunge in oil prices and higher government spending are expected to widen the fiscal deficit in 2020.
Notwithstanding Kuwait¡¯s large oil reserves, the global shift to cleaner energy threatens economic and fiscal sustainability over the long term. Large financial assets underpin Kuwait¡¯s economic resilience, but fiscal and structural reform are key to offset the risks of lower oil prices and uncertain output.