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Kuwait macro | Heightened challenges call for serious policy intervention

COVID-19, oil plunge restrain fiscal flexibility. We lower our 2020e non-oil GDP growth forecast to -4% vs. 2.8% previously, on sluggish demand and private consumption. With the deficit expected to reach KWD10.08bn in 2020e (31% of GDP) and KWD7.5bn in 2021e (21% of GDP), and the current account standing at -5.4% of GDP in 2020e, we view the approval of the debt law as crucial. We cut the overall real 2020e GDP estimate to -6.12% from 1.58%, dampened by the 38% y-t-d contraction in oil prices. Nonetheless, we expect the post-parliament era, under the new Emir, to bring a wave of new socioeconomic reforms in the ensuing years, stimulating recovery in the long run.

All eyes on potential debt law; A breather, not a trigger. We expect the debt law, allowing the government to resume borrowing following a pause since 2017, to be approved for FY21e, with an initial ceiling of KWD20bn. This is supported by the accelerated depletion of the General Reserve Fund (GRF) (cKWD20bn), alongside an outstanding debt of c5.5bn, leaving room for only cKWD14.5bn of new debt. That said, our projected deficit for 2021e of KWD7.6bn accounts for c50% remaining debt capacity. We forecast the 2020e deficit to deplete the full cash portion of the GRF, given the current KWD1.5bn/month cash run rate.

Wider 2020 deficit calls for faster consolidation measures in 2021e. The potential implementation of a 5% VAT would generate cKWD500mn-1bn (non-oil revenues up 2% of GDP) and bring non-oil revenues to KWD2.3bn. We see headline inflation accelerating to 2% in 2021e. With expats accounting for c70% of the population, a quota bill is expected to mitigate the heavily skewed demographic imbalance, and soften budgetary pressures. Nonetheless, we look for it to have an adverse impact on private consumption (-3% in 2021e). As per our figures, every 5% drop p.a. in expat population would result in less than 0.2% of savings in the government’s wage bill.

Capex to stabilise in 2021e. The approval of the debt law, along with the implementation of the VAT, would allow for a stable capex of KWD2bn (10% of expenditures) in 2021e vs. an average yearly increase of 17% over 2012-17, and an average decrease of 15% over 2018-20. Given the current structural backdrop, we believe deeper consolidations are inevitable to achieve sustainable revenues and lower opex.