EUR 119.50 For Business Accounts Only

Kuwait macro | Initiate with focus on domestic recovery

Domestic activity is key in 2019. We are positive on Kuwait in 2019, expecting non-oil GDP growth of 3% vs. an estimated 2.8% in 2018, mainly driven by a recovery in domestic investment and consumption. A continued increase in the government’s capital spending (17% of budgeted expenditures in 2019e vs. 15% 2018e) and a strong project awards pipeline for 2019, worth USD8.19bn, up 40%, are key for our outlook. However, as part of OPEC+, Kuwait is forecasted to cut oil production by 3% in 2019, as per the Dec-18 agreement, bringing oil GDP growth to -1% in 2019e vs. 2.9% in 2018e. This should lower overall GDP growth to 1% in 2019 vs. 2.8% in 2018e.

Economic growth key theme of FY19/20 budget. Kuwait’s budget supports our positive view, signalling no signs of austerity measures. This comes as salaries and subsidies are maintained at 70% of total expenditures, same as 2018. We believe it paves way for strong consumption pick-up of 3.5% in 2019e. We view banks, real estate, logistics, and retail as the main beneficiaries of the country’s domestic recovery story. We expect fiscal deficit to average 12.8% in the coming 2 years, mainly on the drop in oil prices and production. However, we see Kuwait’s sovereign fund, KIA, playing a crucial role in maintaining public investments at 17-18% of total expenditures.     

Expect 1 rate hike by the CBK in 2019, as repo rate approaches discount. We expect the CBK will raise its discount rate by 0.25% in 2019, the first hike in a year. This should follow the anticipated increase in Fed rates, noting the repo rate is currently at 2.75%, the closest level to the discount rate since 2016. We see lending and deposit rates following suit, reaching 5.2% and 3.5%, respectively, by end-2019. We are positive on lending growth, eyeing 5.5% growth in 2019e vs. 4.8% in 2018, despite increased lending rates, on the recovery in real estate sales and consumption growth. We see no risk on the peg in the short to medium-term, as Kuwait’s foreign assets stand at 480% of GDP.

Kuwait to see inflows of USD2.1bn on MSCI EM upgrade and banks’ FOL removal. The upgrade, expected in May-19, would result in Kuwait having a weight of 0.3% of the EM index, along with passive inflows of USD2bn. We also look for another USD104mn of flows, on the back of the banks’ FOL removal. Total flows would represent c10-11% of MSCI Kuwait’s market cap, on our calculations. Key beneficiaries include NBK KK, Zain KK, and KFH KK. The MSCI Kuwait index currently trades at 14.39x, an 18.8% discount to Saudi Arabia’s 17.73x. This comes against a 2019e earnings growth of 24.2% vs. 13.27% for Saudi.