Economic impact of Covid-19 on Kuwait - Economic Research Department National Bank of Kuwait - KFAS
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Economic impact of Covid-19
on Kuwait
Economic Research Department
National Bank of Kuwait
May 2020Summary: Large economic hit but bounce seen in H2
• Like all countries in the Gulf region and elsewhere, Kuwait’s
economy has taken a major near-term hit from the spread of and
required response to the Covid-19 pandemic.
• The main impact has come from a combination of forced business
closures, travel restrictions and supply chain disruptions that have
hit the retail, hospitality, travel and transportation sectors hard.
• On top of this, the collapse in global oil prices partly triggered by
the virus has hit confidence and the government’s finances.
• We see an economic rebound in H220 assuming the virus is
contained in Q2 and oil prices start to recover. But a return to
‘normal’ will take longer and some sectors could change forever.
NBK Economic Research
2Virus spread: Rapid rise in cases since February
• Kuwait’s first confirmed case of COVID-19 was announced on 24
February; it now has around 7,600 cases, the 4th highest in the Gulf.
Covid-19 cases, 000s (days since first case)
40 40
As of May 9 KSA, 37.1
35 35
30 30
25 25
Qtr, 21.3
20 20
UAE, 17.4
15 15
Kwt, Bhn,
10 7.6 4.4
10
5 5
Oma, 3.2
0 37136 0
1 11 21 31 41 51 61 71 81 91 101
Source: WHO / National sources
NBK Economic Research
3Lockdown steps: Limited business for 11 weeks
• Kuwait was the first country in the Gulf to announce a public
holiday that forced some business to close or reduce activity on
March 12. A partial curfew has been in effect since March 22.
• The public holiday is currently due to last until at least May 28, or
11 weeks (around 20% of the full year). A more severe 24-hour
curfew was put into effect from May 10.
• As yet there are few economic indicators to help guide us on the
scale of the drop in economic activity.
• Some estimates from other countries point to a drop in activity of
around one-third during lockdowns. But some of this could be made
up once economies are reopened.
NBK Economic Research
4Oil impact: Output, prices unlikely to rebound quickly
• Adding to the challenge, oil prices have been hammered by a
combination of a shuttering of global activity and the breakdown of
an OPEC+ supply deal. Brent has plunged 66% to $20 since mid-Feb.
• OPEC has now announced unprecedented production cuts effective
from May and to last 2 years. So far this has had little positive
impact on prices but could become more effective over time.
• Recovery in oil prices will be gradual given uncertainty over global
economy and the huge overhang of oil inventories that must be
reduced. We assume Brent averages $35 this year and $50 next.
• OPEC-driven cuts will see Kuwait’s oil output fall 8% this year on
average to 2.46mb/d, and to 2.42 in 2021.
NBK Economic Research
5Oil impact: Prices have crashed to historic lows
Brent crude oil prices, $ pb (mth avg)
140 140
120 120
100 100
80 80
60 60
40 40
20 20
Latest = May 8
0 0
200 0 200 3 200 6 200 9 201 2 201 5 201 8
Source: Refinitiv
NBK Economic Research
6Economic impact: Negative growth seen this year
• Estimates of the impact on non-oil growth this year are highly
uncertain and still being adjusted. The IMF projects Kuwait’s non-oil
GDP to decline 2.5% this year; we forecast a drop of 4%.
• This would be the weakest performance since financial crisis,
comparable to falls recorded across Gulf economies but far smaller
than in the US and Europe.
• One factor limiting the drop could be the large role of the
government sector in the economy, where the impact should be
more modest. Also Kuwait could be less exposed to a drop off in
global trade and capital flows than some countries.
• We expect non-oil growth to rebound 3% in 2021.
NBK Economic Research
7Economic impact: Growth negative across GCC
Non-oil GDP in 2020, %
2 1.2 2
0 0
-1.1 -1.2
-2 -2
-3.0 -3.0 -3.0
-4 -4
-4.0 -4.1
-6 -6
-5.9
-8 -7.5 -8
Total GDP*
-10 -10
UAE Qtr Bhn KSA Kwt Oma Chi Wld US EZ
Source: NBK / IMF WEO April 2020 * From IMF
NBK Economic Research
8Economic impact: Some sectors take very direct hit
• All sectors will be affected, but for some the impact is especially
large and direct.
• Retail will suffer from mall and shop closures and social distancing
• Hospitality (esp. restaurants) similar, and consumer hygiene fears
• Transport affected by reduced travel and movement restrictions
• Recreation and leisure hit by reduced spending on non-essentials
and worries over crowd gatherings
• Though in Kuwait, the combined shares of these sectors is fairly
small at below 10% of total GDP, less than in many other countries.
NBK Economic Research
9Economic impact: Some sectors take direct hit (cont.)
GDP of key non-oil sectors, % GDP, 2018
10 10
9 8.6 9
8 7.7 8
7 7
6 6
5 4.4 5
3.9
4 4
3.0 2.9 2.9
3 3
2 1.4 1.2 2
0.9
1 1
0 0
Source: CSB / NBK * excludes oil refining
NBK Economic Research
10Economic impact: Real estate also under pressure
• Residential property may hold up NBK real estate price indices, % y/y
25 25
given solid fundamentals, but the 20
Homes
20
Apartment units
apartment sector was already 15
Apartment buildings
15
10 10
soft and could see fresh 5 5
weakness given economic 0 0
-5 -5
pressures including on expats. -10 -10
-15 -15
• Malls and commercial properties -20
2015 2016 2017 2018 2019 2020
-20
lowering and postponing rents for Source: NBK
their struggling tenants. This will
be reflected in softer commercial
property prices and sales.
NBK Economic Research
11Economic impact: Equity markets reacted sharply
• Kuwait’s stock market followed Kuwait All Share index
7000 7000
global trends, and by mid-March
6500 6500
was -30% from its Jan peak
6000 6000
though has crept back up since.
5500 5500
• The MSCI EM index inclusion 5000
30% drop from Jan peak
5000
4500 4500
(due May) was postponed to
4000 4000
November but could generate Sep-19 Nov-19 Jan-20 Mar-20
$2-3 billion in passive inflows. Source: Refinitiv
• Investor sentiment will remain
weak until the virus and oil
prices pressures subsides; full
recovery may take some time.
NBK Economic Research
12Economic impact: Labor market likely to contract
• Jobs market set to contract amid 8
Employment, % y/y
8
growth slump and uncertainty
6 6
over outlook.
4 4
• Many private sector jobs held by 2 2
0 0
expats are likely to be the most Kuwaiti
-2 -2
vulnerable. Non-Kwti (ex domestics)
-4 -4
2008 2010 2012 2014 2016 2018
• Kuwaiti jobs unlikely to be badly Source: PACI
affected and more nationals
could fill many expats vacancies.
• But a number of foreign workers may need to be rehired when the
economy rebounds, possibly raising the cost of doing business.
NBK Economic Research
13Policy measures: Bank lending supported
• Policy measures by the authorities so far have focused on ensuring
the supply of bank credit to affected firms and easing pressure
consumers by freezing loan repayments.
• Interest rates were cut by a cumulative 125 bps to 1.5% (discount
rate) following multiple cuts by the US Federal Reserve.
• Bank regulations on loan-to-value limits, risk weightings and
liquidity requirements have been relaxed to ease stress on banks
and give them more space to lend and support the economy.
• Loan repayments have been frozen for 6 months for all affected
customers at no extra cost.
NBK Economic Research
14Policy measures: Bank lending supported (cont.)
Policy interest rates, %
7 7
Kwt discount
6 6
US Fed target rate
5 5
4 4
3 3
2 2
1 1
0 0
200 8 201 0 201 2 201 4 201 6 201 8 202 0
Source: Refinitiv
NBK Economic Research
15Policy measures: Bank lending supported (cont.)
• In partnership with the government, banks will also provide
subsidised up to 3-year loans for business:
- Interest rate of 2.5%, government will pay full interest in year
1, half in year 2 and none in year 3.
- For SMEs, government will pay full interest in years 1 and 2 and
half in year 3. 80% of these loans will be provided by a
government SME fund at zero interest.
- Will cover expected cash-flow shortfall to end-2020, cannot be
used to repay debt and is for firms that were healthy pre-crisis.
• Some cuts in government fees, spending measures. However
Kuwait has so far stayed away from large direct fiscal measures.
NBK Economic Research
16Economic impact: Fiscal deficit set to widen
• The drop in oil prices will have an immense impact on the public
finances, which could in turn shape the way the government
responds to the crisis and have long-term implications.
• The fiscal deficit could reach KD13bn or around 40% of GDP this
year (9% last year) – the weakest since the Iraqi invasion.
• We assume that overall spending will be maintained at last year’s
level, with cuts in capital spending offset by higher current spending
including on health and other emergency measures.
• This will support the economy in the near term. However we would
expect spending to be cut next year as the government takes steps
to bring the deficit under control.
NBK Economic Research
17Economic impact: Fiscal deficit set to widen (cont.)
Fiscal balance, % GDP (before transfers)
40 40
31
30 26 26 30
22
20 16 20
8
10 10
0 0
-3
-10 -10
-9 -9
-13 -14
-20 -20
-30 -30
-40 -40
-40
-50 -50
09/1 0 11/1 2 13/1 4 15/1 6 17/1 8 19/2 0
Source: MoF / NBK
NBK Economic Research
18Economic impact: Measures to fund the deficit
• Financing the deficit could be a challenge. This year’s deficit could
deplete most of the est. KD16bn held in the General Reserve Fund.
• The government has huge financial resources in the longer-term
Future Generations Fund, but these cannot be easily accessed
under current laws.
• One option would be for parliament to pass the debt law, which
would enable the government to issue new debt and take
advantage of Kuwait’s good credit rating and low interest rates.
• However this step is controversial among some MPs, and would
also best be followed by reforms to improve long-term financial
stability, such as spending controls or revenue raising measures.
NBK Economic Research
19Reforms: Priorities once virus impact contained
• In our view, the debt law should be passed quickly to ensure there
is sufficient fiscal space to avoid drastic spending cuts (esp. capex)
that would risk hurting demand and long-run growth potential.
• The government could also extend its current measures to include
direct support such as (temporary) private sector wage guarantees
or moves to make the loan subsidy program even more attractive.
• Once the virus is contained, urgent measures are needed to raise
non-oil budgetary revenues (i.e. excise taxes, VAT) and rationalize
subsidies. Broader economic challenges should also be addressed
such as improving the business environment and promoting private
activity to create more jobs for Kuwaitis entering the labor force.
• These reforms would help unlock Kuwait’s full potential.
NBK Economic Research
20Economic impact of Covid-19 on Kuwait
Thank you.
May 2020
NBK Economic Research
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