IMF Executive Board Concludes 2010 Article IV Consultation with Kuwait

Public Information Notice (PIN) No. 10/93
July 21, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 16, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kuwait on a lapse of time basis. Under the IMF’s lapse of time procedures, the Executive Board completes the Article IV consultations without convening formal discussions.1

Background

The 2010 consultation discussions were held against the backdrop of the global financial crisis, which has had an adverse impact on Kuwait via trade and financial channels. The oil sector was affected by a large contraction in global oil demand and a decline in oil prices, while the financial sector—with large foreign assets and liabilities—was affected by the tightening of global liquidity conditions and declining asset prices, both domestically and abroad.

In 2009, real Gross Domestic Product (GDP) is estimated to have contracted by about 4½ percent—the weakest performance among Gulf Cooperation Council (GCC) countries—on account of a decline in real oil GDP of more than 11 percent, and flat real non-oil GDP, mainly reflecting weaker activity in the financial and construction sectors.

Lower domestic demand and a 12 percent drop in import prices reduced average consumer price inflation to 4 percent. Equity prices, money growth, and credit growth declined significantly. Fiscal and external surpluses narrowed as oil revenues and investment income fell. The Kuwaiti dinar (KD)—which is pegged to an undisclosed basket of major currencies—depreciated by about 4 percent against the U.S. dollar.

The financial sector, particularly investment companies (ICs), experienced funding pressures and deterioration in asset quality. Five ICs are known to have defaulted in 2009–10 and banks’ nonperforming loan (NPL) ratio doubled to 10 percent in 2009. Nevertheless, the sector appears stable, mainly due to swift actions by the authorities and its high capital adequacy ratio (CAR around 18 percent at end-2009). The authorities’ measures were extensive, ranging from liquidity support to banks to the introduction of a financial stability law.

Executive Board Assessment

In concluding the 2010 Article IV Consultation with Kuwait, Executive Directors endorsed staff’s appraisal, as follows:

The global financial crisis had a significant impact on Kuwait given its international trade and financial linkages. The impact was felt strongly in 2009 as real GDP contracted, asset prices declined, and fiscal and external surpluses narrowed. The financial and non-financial sectors witnessed a substantial fall in profitability, and five ICs defaulted in 2009–10. Credit growth slowed significantly. The financial system remained stable, underpinned by swift policy actions by the authorities, but credit growth and non-oil activity were subdued in light of the absence of fiscal stimulus and the limited utilization of the financial stability law.

The economic outlook is broadly positive. The economy is expected to rebound in 2010, and to grow steadily over the medium term as the global recovery boosts the demand for oil and the government implements its four-year development plan, starting with an expansionary budget in 2010/11. The fiscal and current account balances are expected to remain stable in 2010–11 and improve in subsequent years, as oil receipts and investment income recover.

The financial sector is expected to continue to face challenges in the immediate term. Rising NPLs and large concentrations in banks’ loan portfolio—particularly in real estate, ICs, and equities—are a source of concern. Nevertheless, aggregate financial soundness indicators show that the banking sector is well capitalized and highly liquid, which should help the system to remain stable. On the other hand, challenges facing ICs will be more extensive.

The economic outcome for 2010 depends largely on government spending and the associated private investment. External risks to the outlook include a weaker than expected global recovery and a deterioration in the regional economic or political environment. The overarching domestic risks would be associated with the inability of the government to meet the spending targets set out in the development plan. Political gridlock could delay necessary reforms and impact implementation, and bureaucratic hurdles could discourage private sector participation.

Stress tests indicate that the banking system could reasonably withstand significant shocks, although some banks are vulnerable to a severe macroeconomic shock. Stress tests for ICs point to their limited capacity to withstand adverse shocks. Stress tests of listed nonfinancial corporations suggest vulnerability in real estate and industrial sector companies to a prolonged economic slowdown and financing constraints.

The macro policy mix is adequate but growth of current expenditures should be contained. Increases in recent years in wages, subsidies, and transfers could undermine long-term fiscal sustainability and should be moderated. As monetary policy remains constrained by the exchange rate regime, macroprudential policies should ensure financial stability if inflationary pressures were to reemerge. The real exchange rate is broadly in line with fundamentals, and the current exchange rate regime remains appropriate in the run up to the GCC monetary union.

Successful implementation of the authorities’ growth agenda would require progress in structural reforms. In this context, the passage of recent key laws, namely the Capital Markets Law, the Labor Law, and the Privatization Law is welcome. The authorities should move ahead with an efficient implementation of these laws and the amendment of other key legislation, particularly the Companies and Tender Laws. The implementation of the development plan should take into account project viability, absorptive capacity, and supply constraints.

The financial system’s oversight framework should be strengthened. Proper coordination should be ensured between the three regulatory agencies—the Central Bank of Kuwait, the Capital Markets Authority, and the Ministry of Commerce and Industry, particulalry with regards to ICs; and the crisis management, contingency planning, and resolution frameworks should be enhanced. The authorities’ plans to introduce an enhanced regulatory prudential structure over ICs are welcome.

If promulgated, the household debt relief law would undermine the financial culture. The law was passed by the National Assembly but rejected by the Amir. Targeted household debt relief could be implemented instead through the already existing Insolvency Fund.

Kuwait: Selected Economic Indicators, 2004–11

 
          Prel. Est. Proj.
  2004 2005 2006 2007 2008 2009 2010 2011
 

Oil and gas sector

               

Total oil and gas exports (in billions of U.S. dollars)

26.7 42.4 53.2 59.1 82.6 46.7 56.5 61.2

Average oil export price (in U.S. dollars/barrel)

35.7 50.6 61.2 70.4 93.7 58.2 73.0 75.4

Crude oil production (in millions of barrels/day)

2.29 2.57 2.64 2.57 2.68 2.26 2.29 2.39
  (Annual percentage change, unless otherwise indicated)

National accounts and prices

               

Nominal GDP (market prices, in billions of Kuwaiti dinar)

17.5 23.6 29.5 32.6 39.8 28.2 33.1 35.9

Nominal GDP (market prices, in billions of U.S. dollars)

59.4 80.8 101.6 114.7 148.0 98.4 115.5 125.1

Real GDP (at factor cost)

11.1 10.4 5.3 4.6 5.6 -4.4 1.9 4.5

Real oil GDP

8.7 12.1 2.8 -2.6 3.3 -11.4 1.0 4.5

Real non-oil GDP

12.1 10.6 8.3 11.1 6.5 0.0 2.5 4.5

CPI inflation (average)

1.3 4.1 3.1 5.5 10.6 4.0 4.0 3.4

Unemployment rate (Kuwaiti nationals)

3.9 3.8 4.0 ... ... ... ... ...
  (In percent of GDP at market prices)

Investment and savings

               

Investment

15.0 14.6 15.9 19.3 18.9 10.9 16.8 18.6

Public

3.7 3.0 2.8 3.3 3.5 5.4 5.9 6.2

Private 1/

11.3 11.7 13.1 15.7 15.4 5.5 10.9 12.4

Gross national savings

41.2 51.8 60.6 56.1 59.6 40.0 46.1 48.8

Public

36.6 55.7 60.2 55.7 47.5 47.2 41.3 43.3

Private 1/

10.7 1.1 4.5 2.2 12.3 -7.2 4.8 5.5

Savings/investment balance

26.2 37.2 44.6 36.8 40.7 29.1 29.3 30.1
  (In percent of GDP at market prices)

Budgetary operations 2/

               

Revenue

55.4 75.6 66.5 68.6 65.1 58.1 61.9 62.4

Oil

42.9 51.7 48.0 51.5 53.4 48.6 51.6 51.5

Non-oil, of which:

12.4 23.9 18.6 17.1 11.7 9.5 10.4 11.0

Investment income

9.0 21.4 15.7 13.8 8.8 5.8 7.1 7.8

Expenditures and net lending

32.8 27.2 33.9 27.9 49.1 40.1 45.8 45.0

Current 3/

28.6 23.6 29.9 23.8 44.6 34.8 39.5 38.8

Capital

4.2 3.6 4.0 4.1 4.5 5.2 6.3 6.2

Balance

22.6 48.5 32.6 40.7 16.0 18.0 16.2 17.4

Domestic financing

-5.7 -1.2 -2.8 -3.1 -4.6 -1.9 -1.0 -2.1

External financing

-16.9 -47.3 -29.9 -37.5 -11.4 -16.1 -15.1 -15.3

Non-oil balance (in percent of non-oil GDP) 4/

-61.0 -57.6 -58.8 -59.4 -77.8 -72.4 -82.5 -81.5

Total gross debt (calendar year-end) 5/

17.3 11.8 8.3 6.7 5.7 7.7 6.6 6.1
  (Changes in percent of beginning broad money stock)

Money and credit

               

Net foreign assets 6/

10.3 3.2 12.5 1.1 10.0 8.4 9.4 4.3

Claims on nongovernment sector

14.5 17.6 24.5 35.6 19.2 7.0 8.3 13.1

Broad money

12.1 12.3 21.7 19.3 15.6 13.4 5.5 9.7

Kuwaiti dinar 3-month deposit rate (year average; in percent)

1.6 2.9 5.0 5.2 3.3 1.4 0.9 1.2

Stock market unweighted index (annual percent change) 7/

33.8 78.6 -12.0 24.7 -38.0 -10.0 -0.2 ...
  (In billions of U.S. dollars, unless otherwise indicated)

External sector

               

Exports of goods

29.0 45.3 56.5 62.6 87.0 50.5 61.3 66.2

Of which: non-oil exports

2.3 2.9 3.3 3.5 4.4 3.8 4.7 5.0

Annual percentage change

4.6 22.9 14.6 6.4 25.1 -12.9 24.5 5.7

Imports of goods

-12.4 -15.1 -16.2 -19.1 -22.9 -17.1 -19.2 -20.5

Annual percentage change

25.5 21.4 7.9 17.7 20.0 -25.3 11.8 6.9

Current account

15.6 30.1 45.3 42.2 60.2 28.7 33.8 37.7

In percent of GDP

26.2 37.2 44.6 36.8 40.7 29.1 29.3 30.1

External debt including private sector

15.5 20.2 30.8 57.5 60.6 57.5 ... ...

International reserve assets

7.3 8.1 11.8 15.9 16.7 17.7 24.5 25.9

In months of imports of goods and services

4.4 4.1 5.3 5.9 5.3 6.9 8.5 8.4
  (Percentage change; unless otherwise noted)

Memorandum items:

               

Exchange rate (U.S. dollar per KD, period average)

3.39 3.42 3.45 3.52 3.72 3.48 ... ...

Nominal effective exchange rate (NEER, period average)

-4.0 0.5 0.5 -2.2 2.5 -3.5 ... ...

Real effective exchange rate (REER, period average)

-5.2 2.1 0.9 0.3 8.4 -0.5 ... ...

Sovereign rating (S&P)

A+ A+ A+ AA- AA- AA- ... ...
 

Sources: Data provided by the authorities; and IMF staff estimates and projections.
1/ Also includes government entities.
2/ Kuwaiti fiscal year ending March 31, e.g. 2007 refers to fiscal year 2007/08.
3/ In 2006/07 KD 2 billion was transferred to partly cover the actuarial deficit of the Public Pension Fund. In 2008/09, KD 5.5 were transferred. KD 1.1 billions are budgeted for each year from 2010/11–2014/15.
4/ Excludes investment income and pension recapitalization, but includes transfers for FGF.
5/ Excludes debt of Kuwait's SWF related to asset management operations.
6/ Excludes SDRs and IMF reserve position.
7/ Change in the KSE as of May 24, 2010 for 2010.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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