Much like other Gulf economies, Kuwait is experiencing an economic boom attributed to rising world oil prices. However, the country differs from Bahrain, Oman, and Qatar in that it has not pushed as formally for economic diversification. Rather than hedge against oil dependence, it appears Kuwait is basking in its oil wealth. Kuwait’s citizenry remains optimistic.
According to research conducted by the Kuwait Economic Society, 64% of Kuwaitis surveyed worry most about the high cost of living. The high cost of living is a worry for companies also, especially those in the real estate sector or financial institutions. Kuwait’s real estate market has experienced rising prices due to land scarcity, with Kuwait’s housing and real estate market recording 1% growth during the third quarter of 2007, according to a report by Kuwait Finance House. The growth comes from construction surges in residential, office, and retail space, especially within Kuwait’s capital, Kuwait City.
Growth dependent on oil markets
The Central Bank of Kuwait (CBK) reported on the continued growth the country enjoys, thanks to its domestic oil production and growing international oil prices. Measured at current prices, Kuwait’s GDP grew by 25.8% in 2006, down from 39.7% growth in 2005. The CBK notes that 70.1% of GDP growth during 2006 reflects the positive developments in world oil markets, including price and production increases. For 2006, the oil sector’s value increased by 25.9%, compared with 60.2% in 2005.
In addition to crude production and refining, Kuwait is set to expand its oil sector through large-scale petrochemical projects. One project noted by the Oxford Business Group (OBG) is EQUATE Petrochemical Company’s launch of the $2.5 billion EQUATE 2 chemical plant. The plant plans to export petrochemical products that sell near $500/barrel, instead of the lesser price of $80/barrel for crude oil, according to EQUATE spokesman Mohammed Gharib Hatem.
Relative to the oil sector, non-oil sector growth decelerated in 2006 to 14.5%, down from 20.2% in 2005. Financial institutions contributed the highest portion to non-oil sector growth, rising 68.1% in 2006, up from 37.3% in 2006. .
Kuwait also performed well in the Global Competitiveness Report (GCR), which listed the economy as the most competitive of those in the Gulf Cooperation Council (GCC) from 2007-2008. The GCR rated Kuwait’s macroeconomic stability as the best in the world, due to oil-fueled budget surpluses and high savings rate from the country’s prudence in reinvesting oil surpluses.
the gcr rated kuwait’s macroeconomic stability as the best in the world
Money supply increasing
Kuwait has also found itself worrying less about inflation, regardless of its economic boom. The CPI experienced decelerated growth in 2006, registering only 3.1%, compared with 4.1% in 2005, attributed to decelerating growth in basic goods and services prices.
Although Kuwait is enjoying growth without burdensome inflation, numbers may change in the future. The rapid rise in domestic liquidity from the country’s oil bonanza pushed up Kuwait’s broad money supply. Both phenomenons are attributable to increased credit available to domestic sectors.
However, the government has taken active steps to counter inflationary pressures induced by the dollar peg, from which most other Gulf economies suffer. By shifting the Kuwaiti dinar’s peg against the dollar from 292 fils to 289.14 fils/dollar in 2006, for a 1% decrease, the Central Bank of Kuwait preempted further decline in the dollar’s value, staving off continued loss experienced by those with unchanged pegs to the dollar.
Thanks to Kuwait’s growth and reform, in addition to well-structured banking arena, external investments abroad are on the rise, accelerating by 53.2% in 2006 from a rise in asset values invested by institutions abroad.
Less optimistically, Kuwait continued the regional trend of poor performance in its stock markets. Figures of the Kuwait Stock Exchange (KSE) experienced a downtrend during 2006, including a decline of total value of traded shares by 39.2% and decline in transactions by 24%. Although Kuwait presents a favorable macroeconomic environment, KSE-listed companies experienced a decline in net profits and government resistance to continue with some projects managed by KSE companies.
