EUR 23.30 For Business Accounts Only

Kuwait macro | Cut our non-oil GDP estimate on low capital spending, project awards slowdown

Expect non-oil GDP to decelerate in 2020e, on lower-than-expected capital spending. We downgrade our 2020e non-oil GDP growth forecast by 0.2% to 2.8% vs. 3.0% estimated in 2019e, on the back of our expectation of flat growth in 2020e capital spending. This comes in line with a 4.5% cut in capital spending in the FY20/21 budget. This trend started in 2019, whereby government capital spending declined by 12% from 2018. Accordingly, we lower our overall real GDP estimate for 2020e by 0.12% to 1.58%, still higher than the 2019e forecast of 1.00%, as we expect 2020e oil GDP to grow by 0.38% vs. -1.00% in 2019e, on continued low production levels. This slowdown in non-oil GDP would mainly affect banks (corporate activity is 60% of the loan portfolio) and manufacturing activity (80% of project awards), in our view.

Absence of future fiscal consolidation measures continues to prioritise current spending needs to comply with expenditure ceiling. We estimate total government spending to increase by 10.43% to KWD21.85bn (budgeted KWD22.50bn) in FY20/21e. This should be mainly driven by an 11.60% increase in current spending to KWD19.85bn (budgeted KWD18.93bn), primarily on higher wages and subsidies. This should come at the cost of capital spending, which we expect to remain flat on a yearly basis at KWD2bn vs. a budgeted KWD3.57bn, to comply with the total expenditure ceiling of KWD22.50bn over the coming three years. Accordingly, we estimate capital spending to stand at 9.07% of total spending, well below the budgeted 16.0%.

Total project executions fall in 2019; Expect same trend in 2020. Project awards execution dropped by 10.7% y-o-y in 2019, largely on 12% lower capital spending, in our view. According to MEED projects, we expect a strong pipeline in 2020e worth KWD3.52bn, 2.5x that of 2019. However, the execution pace of these awards is extended over a period of six years, amounting to KWD2.82bn in 2020e. This would imply a 34% y-o-y drop in 2020e executions, assuming a 100% execution ratio, in line with the overall cuts in capital spending during the year.

Parliament approval of new debt law a key upside, amid continued depletion of the General Reserve Fund (GRF). Parliament’s approval of the debt law is a prerequisite to allowing the government to increase spending without putting further pressure on the GRF. The fund’s balance currently stands at KWD21bn, sufficient for another four years of deficit. Accordingly, issuing debt of up to KWD2bn p.a. would extend this period to eight years. This comes given we rule out the possibility of fiscal consolidation, due to Parliament’s current stance.