Annus Horribilis With Tentative Recovery From 2010
Economic risks are the main threat to stability in Kuwait as we move into 2009, with a rise in unemploymentand a decline in living standards having the potential to destabilise the country. Thegood times are certainly over: Q209 brings a new downward revision to our average OPEC Basketprice forecast, with our projections having dropped to US$39.50/bbl for 2009 and US$43.50/bbl for2010. However, this will not be a macroeconomic disaster for Kuwait, but parliamentary stagnationand instability makes it more of a concern that some of its neighbours, particularly looking furtherahead to the recovery period, when it will need to entice foreign investors.
On the economic front, things are looking substantially more challenging, but not disastrous, in2009. We see a real GDP contraction of 1.0%, with extensive government infrastructure spendingmitigating declines in consumer spending (exacerbated by the loss of significant numbers of recentlyunemployed expatriate workers), private investment and exports. In conjunction with substantiallylower oil prices, this will send the budget into deficit (to the tune of 6.4% of GDP). The currentaccount will remain in surplus, however, and growth and the fiscal balance will return to positiveterritory in 2010.
The political context in Kuwait remains messy, and we see early elections as a distinct possibilityin 2009 or 2010. The Kuwaiti government is under increasing pressure to deal with the economicturmoil, and, as parliament becomes even more angry with the government, this could lead thelatter to make some potentially damaging decisions. While we would not expect this to result in anymeaningful change of government - parliament is already dominated by the opposition and theroyal family is not about to be overthrown - it could destabilise the country, delay reforms, deterinvestors and lead to even further fiscal laxity.
Political stagnation also continues to affect the business environment, as parliamentarians refuseto approve reform measures. We have warned of the dangers of this phenomenon to foreigninvestment on countless occasions, and, over the last few months this has played out in dramaticform: two important foreign investment deals have been shelved - the al-Zour refinery and DowChemicals deal - at a time where keeping economic activity on an even keel is more crucial thanever. There are also systemic risks in the banking sector, although we expect the government tobail out any lender that looks like it could fail.
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