Kuwait struggles with low oil prices

• DOI: http://doi.org/10.1111/oet.12817
• Date: 01 October 2020
• Published date: 01 October 2020

FOCUS

Kuwait struggles with low oil prices

Kuwait is the fourth biggest oil producer in OPEC with

capacity of over 3 mn bpd and a current OPEC-plus pro-

duction cap of 2.67 mn bpd (see Table 1).All domestic pro-

duction comes from Kuwaiti Oil Company (KOC), which

is state-owned Kuwait Petroleum Company's (KPC) main

upstream subsidiary. The country has one of the most oil-

dependent economies in the world, with oil revenues

accounting for nearly 90% of government income and

more than 70% of export revenues in 2019—which has left

the country particularly exposed to lower oil prices and

weaker demand. The 2019/2020 export revenue total of

$52.4 bn was down 18% on 2018/2019, which saw Kuwait's

budget deficit jump by $7 to $18.4 bn—the largest deficit

in 3 years, and the sixth in a row. This year looks much

worse, although with a population of just 4 mn, oil reve-

nue per person remains relatively high.

1|CRITICAL PARLIAMENT

The economic challenges are causing tension among

Kuwait's rulers. Kuwaiti policy is overseen by its power-

ful Emir, Sabah Al-Ahmad Al-Jaber Al-Sabah, but the

country also has an active parliament, which has a veto

over new laws and can hold government officials to

account. It has blocked new proposed debt-raising

legislation,

1

which would have allowed Kuwait to borrow

to cover its current budget shortfalls (as other Gulf Coop-

eration Council members have done), avoiding the need

to further draw on its reserves. Until recently, Kuwait

contributed about 10% of oil revenues to its Future Gen-

erations sovereign wealth Fund (FGF) managed by the

Kuwait Investment Authority (KIA), but those contribu-

tions have now been suspended. With Kuwait's budget

deficit in the 2020 to 2021 financial year possibly rising to

more than $40 bn, the National Bank of Kuwait warned

in May that “funding of the deficit could be a challenge

and would exhaust most of the estimated KD16 bn ($52

bn) remaining”in the FGF.

This could leave Kuwait with liquidity problems,

including an inability to pay extensive public sector sala-

ries, which would cause serious economic difficulties—

leading to suggestions that the debt law may be passed by

royal decree, overruling parliament. At the end of

August, Finance Minister Barak al-Shitan said such a

move would enable Kuwait to borrow 20 bn dinars ($65.3

bn) over 30 years

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(against a GDP of about $130 bn),

which he said was “urgent and necessary.”Nevertheless,

even at low prices, revenues remain substantial, with

over $3 bn per month in oil export earnings over the first

5 months of this year, which limits the amount that

needs to be borrowed.

However, such borrowing cannot be repeated every

year. In March, ratings agency, Moody's, said that even if

the debt law is passed this year, Kuwait will still need to

borrow large amounts over the next few years, potentially

“larger than the government can finance at affordable

costs in domestic and international markets alone.”To

avoid this, the country needs to make sharp cuts to

spending, which will be painful for a population long

used to generous government handouts and well-paid

state jobs. With reserves in decline, Moody's warned that

it may downgrade Kuwait's sovereign rating if the debt

law is not passed.

The situation underlines the need for Kuwait to diver-

sify its economy. The country has, like Saudi Arabia,

launched a central program to achieve this by 2035.

Dubbed the “New Kuwait Vision 2035”national develop-

ment plan, it aims to transform Kuwait into a financial,

commercial, and cultural hub for the northern Mideast

Gulf region. The plan focuses on long-term development

priorities including infrastructure projects and strength-

ening the private sector, to reduce Kuwait's dependence

on oil export revenues—although so far, it has had little

success. Kuwait has also implemented reforms to allow

100% foreign ownership of inward foreign investments in

most non-oil and gas sectors in an effort to encourage for-

eign businesses to set up in Kuwait.

Meanwhile, in an attempt to retain wealth domesti-

cally and provide good private sector jobs for local peo-

ple, Kuwait aims to have 100% of the executive,

technical, and supervisory jobs in its oil sector held by

Kuwaiti nationals by early 2021. Kuwait's government

will also try to increase the number of domestic firms

operating in contracts with KPC by 80%. This may help

temporarily, but will not substitute for economic diversi-

fication and cuts in public expenditure, which are essen-

tial as Kuwait, along with all other oil and gas producers,

adjusts to structurally lower oil prices and uncertainty

over future demand.

DOI: 10.1111/oet.12817

Oil and Energy Trends. 2020;45:3–11. wileyonlinelibrary.com/journal/oet © 2020 John Wiley & Sons Ltd 3