Kuwait’s budget surplus for the first eight months (April 2012 – November 2012) of fiscal year (FY) 2012/2013 reached KWD14.7bln (USD52.0bln), exceeding the KWD11.6bln surplus recorded at the end of the same period of FY 2011/2012.

8-Month Budget Surplus at KWD14.7bln
Revenue stood at KWD21.6bln at end of November 2012, far exceeding the budgeted amount of KWD9.3bln. Oil revenue continues to make up almost all of the government’s income, accounting for nearly 95.0% of the total revenue. Kuwait traditionally underestimates oil prices and set it at just USD65.0pb in the FY 2012/2013 budget plan, resulting in a low revenue projection. Oil prices (Brent) averaged at USD111.9pb in 2012. Non-oil revenue surpassed the budgeted amount for the period by KWD367.0mln, reaching KWD1.1blln.

Expenditure fell short of the budget target for the period by KWD7.2bln; reaching just KWD6.9bln. Government spending was also slightly down on the same period of FY 2011/2012 when it reached KWD7.1bln. Although wages expenditure grew by 24.7% y-o-y to KWD1.9bln, transfers declined by 23.0% while capital spending fell by 20.3% to just KWD577.0mln. This compares with budgeted capital expenditure of KWD2.6bln for the full year.

2013 Kuwait Fiscal Outlook
We have revised up our FY2012/13 budget surplus forecast to 26.4% of GDP from 22.3% of GDP previously following lower current and capital spending as well as higher revenue collection.

Kuwait posted record budget surplus of KD13.2bn (29.8% of GDP) in 2011/2012 (April 2011-March 2012) as revenue, driven by the oil sector, grew by 40.6% y-o-y and expenditure rose by 4.8%. We expect fiscal policy to remain expansionary in the medium term. The budget for FY 2012/2013 includes spending of KWD21.2bln (USD75.0bln), a 9.3% increase on the previous budget. However, the government has a track record of failing to dispense its budget in full as political paralysis constrains its ability to spend, particularly on capital projects. Capital expenditure growth will remain modest, but current expenditure will increase steadily as, assuming only limited success in replacing expatriate labour with nationals in the private sector, the government wage bill rises. In addition, faced with a rising incidence of strikes by public-sector workers, the government has been forced to raise their salaries. So long as oil prices remain high, such rises in current expenditure will not pose a threat to Kuwait’s fiscal position.

The government has increased the proportion of revenue it allocates to the Reserve Fund for Future Generations (RFGG) in FY 2012/2013, from 10.0% to 25.0%. Although this revenue would normally have gone to the General Reserve Fund, which is also managed by the Kuwait Investment Authority (KIA) and covers all budgetary expenditure, it is more difficult to access from the RFGG. The move follows warnings from the International Monetary Fund (IMF) that Kuwait could struggle to preserve its oil wealth for future generations if it does not exercise fiscal consolidation. Although the higher allocation to the RFGG addresses one aspect of such concerns, it will not be implemented in conjunction with a reduction in current expenditure.

Nonetheless, oil will continue to account for the bulk of budget revenue, as no new income or sales taxes are expected. Income from the foreign investments of the KIA is expected to increase steadily, although low global interest rates and economic uncertainty in the US and, in particular, the Eurozone will constrain returns in the coming years. We expect a budget surplus of 26.4% of GDP in FY 2012/2013.

Narrowing Current Account Surplus
We expect the current-account surplus to narrow in to 39.2% of GDP in 2013 from 44.1% of GDP in 2012 as oil export earnings decline. Oil export revenue will continue to account for the bulk (about 92.0%) of export earnings in 2013-2017. Slowly rising investment, by both the government and the private sector, should lead to steady growth in the import bill. In contrast to the healthy trade surplus, the non-merchandise balance is forecast to remain in deficit in 2013-2017. Despite this, income credits are expected to grow steadily, chiefly reflecting earnings on the country’s large and growing stock of foreign assets. Higher income inflows will more than offset an increase in income debits (owing to rising profit repatriation by foreign firms), boosting the income surplus to USD17.4bln in 2017. However, the current transfers account will continue to show a large and growing deficit as outward remittances from Kuwait’s many foreign workers increase.

Conclusion
In the medium term, Kuwait’s fiscal policy is expected to remain expansionary. Current expenditure will rise as the government wage bill rises. However, high current expenditure will not pose a threat to Kuwait’s fiscal position as long as oil prices remain high. We believe Kuwait will continue to record strong budget surplus in the coming years buoyed by the robust oil sector. We expect a budget surplus of 26.4% of GDP in FY 2012/2013. Oil will continue to account for the bulk of budget revenue, as no new income or sales taxes are expected in the near terms. Higher oil revenue encourages a ramping up of current spending, which in turn will spur growth in domestic consumption.