Thursday, July 17, 2008

Oil exports keep surplus elevated at 42% of GDP

KUWAIT : In its latest economic brief on the macroeconomic indicators in Kuwait, NBK reports that last year was another record year for Kuwait’s balance of payments (BOP) as oil prices reached new highs resulting in record oil export receipts. However, this was more than offset by strong growth in the country’s imports, service outflows and other transfers, and a slight drop in investment income from abroad. As a result, the current account surplus declined but remained at an impressive 42% of GDP, according to provisional estimates recently released by the Central Bank of Kuwait (CBK). The surplus helped the government continue accumulating foreign assets, mostly through the sovereign wealth fund managed by the Kuwaiti Investment Authority (KIA), though at a slower pace than last year. Official estimates of the foreign asset holdings of the state are not published, however, the local media recently reported figures discussed in a closed-door session of Kuwait’s parliament.

These reports put the assets of the Reserve Fund for Future Generations (RFFG), which holds most of Kuwait’s official foreign investments outside the central bank, at KD 57.9 billion ($215 billion) as at the end of March 2008, up 15.5% over a year earlier. During fiscal year 2007/2008 that ended in March, the government allocated roughly KD 2.0 billion to the RFFG, representing 10% of budget revenues. We estimate another KD 7 billion in realized budget surplus was also invested abroad by KIA. Meanwhile, NBK notices that CBK increased its official foreign reserves by KD 917 million, which is the overall BOP surplus. However, the CBK estimates the broader BOP - which includes the net increase in the government’s foreign assets managed by KIA, Kuwait Petroleum Corporation, and Kuwait Airways Corporation, along with CBK’s reserves – at KD 12.0 billion, slightly above last year’s KD 11.8 billion.

The current account registered a surplus of KD 13.5 billion, following a jump the previous year to a record KD 15 billion. The surplus remained over 10 times its size five years earlier. Since then it has risen in every year except this one, boosted by increasingly higher oil prices. NBK also mentions that a rising import bill was the main reason for the decline in the current account surplus. Imports jumped by 41% to reach KD 5.9 billion. This growth followed a flat year in 2006 and was the most rapid in over a decade. The rise in imports reflects accelerating growth in domestic demand that reached 19% in 2007. Though a detailed classification of imports is not available, we estimate that capital goods accounted for a big part of the increase, with some big ticket items (aircraft and power generation turbines) featuring prominently.

A continued influx of foreign workers to support the rise in economic activity, coupled with rising incomes, was also a factor behind growth in consumer goods imports. In addition, rising prices internationally and the decline in the value of the Kuwaiti dinar relative to the country’s major trade partners other than the US must have also contributed to the jump in the value of imports. During 2007, the KD lost on average 6.4% against the euro and 6% against the pound sterling, but gained 5.9% against the US dollar after the central bank decided to break the pure dollar link and revert back to pegging the dinar to a basket of currencies.
Exports amounted to KD 18.1 billion, with 94% coming from crude oil and refined products. Oil exports were up by 5.7% following a 25% increase the previous year, as the rise in the oil price was more modest. The average price of Kuwaiti crude rose by 12.8% in 2007 to average $66 per barrel.

NBK notes that growth in non-oil exports was more impressive at 19%. Non-oil exports, comprising mainly ethylene products, manufactured fertilizers, and re-exports, rose to just above KD 1 billion for the first time ever. Foreign trade statistics also published by the CBK, show re-exports accounting for almost half of the increase in non-oil exports, and ethylene products for another 32%. Despite the better growth in 2007, non-oil exports remained a small 5.7% of total exports.
The services account deficit widened to KD 981 million. Receipts from services provided to nonresidents rose by 19% to KD 2.7 billion, while payments for services provided by nonresidents were up by 25% reaching KD 3.7 billion. Net outflows for transportation services gained notably, boosted largely by a 36% rise in service provided by foreign entities. Growth in outflows for travel services of 14.3% also had a notable impact on the net services item. These figures have been growing steadily in recent years driven by a growing business activity and standard of living in the country which has raised expenditures on business-related travel and tourism.

Current Account
Net services continued to benefit from the rapid growth of private sector service companies in telecommunications, logistics and retailing that have expanded regionally. Receipts by such service providers rose to KD 1.5 billion in 2007 from a mere KD 14 million only four years before. Meanwhile, net government outflows for services rose by 75%, boosted by rapid growth in government spending on services including those provided by foreign consultants to support an ambitious investment program.
NBK also mentions that another contributor to the current account surplus was net investment income, which amounted to KD 3.7 billion, down 3.8% from the previous year’s record level that saw a 50% jump. Given the continued accumulation of foreign assets by Kuwaiti entities, the drop reflects generally lower interest rates and weak performance of global capital markets, no doubt affected by the global credit crisis.

Roughly two thirds of net investment income accrued to the general government sector, which comprises Kuwait Investment Authority, Kuwait Petroleum Corporation, Public Authority for Social Security, Kuwait Fund for Arab Economic Development, Kuwait Airways Corporation, and the Savings and Credit Bank. Of all four sectors identified in the accounts, only investment companies showed a notable increase in net investment income of 46%, though the total figure remained quite small compared to other sectors.
The deficit on current transfers saw its largest increase in years, jumping by over 37%. The figure consists largely of workers remittances and government assistance to other countries. The outflow reached KD 1.44 billion, more than double its level just four years before. Worker remittances rose 17.6% to KD 1.09 billion on the back of strong growth in the number of expatriate workers.

Capital and Financial Account
The capital account recorded the highest surplus in five years, growing by 75% to KD 447 million. Inflows mostly represented payments to the government from the UN Compensation Commission (UNCC) for losses due to the 1990 Iraqi invasion. Total UNCC inflows to the government and the private sector amounted to KD 365 million, up from KD 228 million in 2006. Since the start of the program in 1994, Kuwait has received roughly KD 3.9 billion, about two thirds going to private individuals and companies. Payments to the government accounted for another 30%.
Mirroring the drop in the current account surplus, net financial flows (comprising direct investment, portfolio investment and other investment), were 25% lower than in 2006, at KD 10.6 billion. The bulk of the outflows were in portfolio investments, which saw a 25% increase over 2006 to reach KD 9.4 billion primarily by the general government sector. Although smaller in size, net direct investment – predominantly outflows by the government- also rose by 64% to KD 3.9 billion. Inflows of foreign direct investment into Kuwait continued to be minor, with the net figure largely unchanged at a mere KD 34 million.

NBK notes that the government sector continued to dominate financial flows, with government entities seeing a net outflow of KD 10.3 billion. Net outflows were down by 14% from the prior year. Portfolio investments continued to account for the bulk of these flows (KD 7.7 billion), followed by net direct investment abroad (KD2.4 billion). In contrast, net accumulation of liquid assets fell compared to the previous two years, when such assets accounted for a considerable part of net government investment outflows.

Local banks saw a net financial outflow in 2006 turn into a net inflow in 2007 of KD 821 million. This was due to a big increase in inflows from non-residents into deposit accounts. This reflected in part the increased reliance of banks on non-resident deposits during 2007 to fund their activities, and in part a rise in speculative positions by non-residents betting on an appreciation in the dinar, both before and after depegging it for the US dollar. Investment companies reported net outflows of KD 477 million, 32% below 2006. The non-financial private sector also saw a small decline in net financial outflows despite an 8% increase in net direct investment abroad to KD 1.1 billion, and a 30% increase in net portfolio investments to KD 509 million. Meanwhile, the ’other (net)’ item - which accounts for errors and omissions in BOP transactions, including private capital flows not reported by financial institutions, recorded an unusually large KD 2.4 billion net outflow, the largest in recent years.

By National Bank of Kuwait

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