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Kuwait macro | Overstated FY21/22 budget deficit; Growth prospects hinge on capex and financing sources

Government announces expansionary draft budget in FY21/22. Deficit is projected at KWD12.1bn, -13.8% from FY20/21 budget, on: i) +6.9% y-o-y in total spending, at KWD23bn (vs. our estimate of KWDc22bn), with a 20% increase in capex and 5% in current spending, and ii) total revenues estimated at KWD11bn, +46% y-o-y from FY20/21e, with oil revenues at KWD9.13bn, accounting for 83% of total revenues, and non-oil revenues at KWD1.8bn (oil price of USD45.0/bbl; production of 2.4mn bbl/d). This marks the eighth consecutive budget deficit, with a 62.17% increase in the new budget’s oil revenues, supported by the COVID-19 vaccine-fuelled recovery that began in 2021.The budget deficit is wider than our estimated KWD7.64bn, attributable to higher capex and lower revenues compared to our assumptions.

Maintain estimates, on favourable oil dynamics. We view the budget, accounting for the resumption of projects that were postponed in light of the lockdown measures, as overstated, with capex of KWD3.5bn vs. our estimated KWD2.07bn. Meanwhile, we see budget oil revenues undervalued, at KWD9.1bn vs. our estimated KWD11.9bn (at oil production and price level assumptions similar to budgeted).This is supported by 9MFY20/21 oil revenues implying KWD9.2bn for full year, at a COVID-19 depressed average price of USD37.0/bbl and production level of 2.5mbd. We maintain our revenue estimate, anticipating higher revenues driven by oil prices, largely compensating for the unannounced consolidation measures, including the 5% VAT, accounted for in our assumption of 2021e non-oil revenues. Based on our calculations, every USD10.0/bbl increase in the average oil price above our estimate generates KWD1.5-2.5bn of additional oil revenues, all else constant.

Political disputes amid wider budget deficit necessitate financing options. With the deficit widening 2.37x y-o-y to KWD5.4bn in 9MFY20/21, amid the impending depletion of the GRF, the debt law remains a key development in mitigating the state’s liquidity crisis and financing the deficit. However, the pending formation of a new cabinet overshadows the passage of the law. We reiterate the urgency in providing a financing breather until the law is passed, such as a potential asset swap between the illiquid GRF and the liquid FRF assets. We continue to monitor the sustainability of Kuwait’s pegged currency, on the looming political uncertainty.

Rollout of COVID-19 vaccine, key upside to non-oil activity. In accordance to the country’s plan to vaccinate 300k individuals/month and 80% of population by September, and the anticipated removal of COVID-19-related restrictions, we expect non-oil GDP to pick up by 3Q21. Conditional on the sustainability of oil prices at/above our estimated average of USD45.0/bbl in 2021e (y-t-d increase of 22% to USD62.0/bbl), and the securing of adequate financing needs, we foresee non-oil GDP growing by 1.50% in 2021e vs. contracting 4% in 2020e.