NBK Economic Brief
KUWAIT: Recent data releases point to a pick-up in key activity metrics after a slowdown in Q1. The ramp-up in Zionist entity-Iran hostilities has sharply increased regional uncertainty, while also pushing oil prices back above our forecast for 2025 of $70/bbl. Our base case still sees Kuwait's non-oil GDP growth at 2.5 percent in 2025, though a lengthy regional conflict that adversely affects economic activity and confidence could weigh on the outlook.
In tandem with higher oil production as OPEC+ accelerates market resupply, the rise in oil prices has lowered the probability of a fiscal deficit larger than our forecast of 8 percent of GDP this year, but we do not see this deflecting the government from its ongoing fiscal consolidation program. One upside risk to growth is the potential approval of the housing finance ('mortgage') law, which could begin to unlock higher household borrowing and consumer spending.
Latest developments
Oil prices surged in mid-June following Zionist entity's attack on Iran. The price of Kuwait Export Crude jumped 6 percent overnight to $73/bblas markets feared disruption to Gulf oil supplies either directly or from Iranian reprisals (including via a closure of the Strait of Hormuz). Earlier in Q2, oil prices had been battered by both global demand and supply side concerns, dropping to a four-year low of $60/bbl in the weeks after President Trump's 'Liberation Day' tariff blitz and OPEC+'s decision to accelerate the pace of supply hikes in May, June and July.
For Kuwait, the more rapid pace of supply increases (+24 kb/d per month) will see the full 135 kb/d of its voluntary supply cuts from 2024 unwound by October 2025 and production reach 2.55 mb/d – almost a year ahead of schedule. Non-oil GDP growth rebounded in Q4 2024 with a strong 4 percent y/y expansion. Growth in Q4 was the fastest in nearly three years and a significant improvement on the 2.5 percent contraction recorded in Q3, according to preliminary official figures. Manufacturing (12.2 percent), real estate (8.6 percent) and hospitality (6.9 percent) all performed strongly.
However, oil sector output extended its run of declines to seven consecutive quarters (-5.7 percent), contributing to a fall in overall GDP of 0.7 percent in Q4. For 2024 as a whole, non-oil growth ticked up to 1.8 percent from 1.0 percent in 2023, though due to further contraction in the oil sector, overall economic growth turned more negative (-2.6 percent). Non-oil private sector activity recorded solid but moderating expansion in May, with the PMI settling down slightly to 53.9 from April's five month-high reading of 54.2.
This is, nevertheless, a ninth consecutive month of expansion for Kuwait's private sector. Growth in output and new orders slowed but remained relatively strong, while the pace of employment growth was the joint fastest in the series' history. Businesses were the most positive about their prospects in a year. Local consumer spending growth (as reported by card transactions) turned negative in Q1 2025 at -5.9 percent y/y, according to Central Bank of Kuwait data.
This was the steepest annual decline since the pandemic, though continues the trend weakness now witnessed for more than a year. This softness is partly a readjustment to the massive surge in spending due to pent-up demand (facilitated by higher savings rates) that accompanied the lifting of Covid-19 mobility restrictions. But it is also well down on pre-pandemic trend rates and reflects the current, relatively more challenging domestic conditions such as higher borrowing costs and sluggish wage and employment growth.
Project activity slowed in Q1 25, with the value of awards falling 51 percent q/q to KD 445 million, according to MEED Projects. Momentum strengthened slightly in April and May with awards totaling KD 336 million in the two months. The transport sector accounted for the bulk of activity year-to-date, with KD 254 million in awards linked to South Saad Al-Abdullah City infrastructure in Q1 and a KD 128 million contract in Q2 for Phase 2 of the Mubarak Al-Kabeer port project. Looking ahead, contracts for the Al-Zour North IWPP (Phases 2 & 3) and Mubarak Al-Kabeer port (Phase 3) and the Shagaya Renewable Energy Complex project (Phase 1) are expected this year.
The improvement was led by the investment sector especially (40 percent m/m) but sales in the residential and commercial sectors also climbed. Year-on-year growth, however, declined (-1.2 percent y/y), due to a high base effect in the commercial segment. After a soft start to 2025 (perhaps linked to seasonal factors), some confidence appears to be returning to the market, with sentiment possibly buoyed by the forthcoming housing mortgage law and potential interest rate cuts in the medium term.
The budget for FY2025/26 was approved by Amiri Decree in late March. A fiscal deficit of KD 6.3 billion (13 percent of GDP) was forecast for FY25/26, wider than the previous year's estimate of KD 5.6 billion, based on lower revenues of KD 18.2 billion (-3.6 percent b/b) and little-changed expenditures of KD 24.5 billion (-0.1 percent b/b). The projected decline in revenues is entirely due to lower anticipated oil receipts (-5.7 percent b/b to KD 15.3bn) after both the oil price (KEC) and oil production assumptions were reduced compared to the previous budget, to $68/bbl (from $70/bbl) and 2.5 mb/d (from 2.55 mb/d), respectively.
Spending restraint is evident in the smallest annual increase in employee compensation in percentage terms (0.8 percent b/b) since the pandemic, which will be offset by lower allocations for subsidies (-2.1 percent) and capex (-1.6 percent), the latter for the fourth year in a row. The long-awaited public debt law was approved by Amiri Decree in April. The law allows the government to issue up to KD 30 billion (60 percent of GDP) in sovereign bonds and sukuk with maturities of up to 50 years, following a hiatus in issuance since 2017. Importantly, it will increase the options available to the government to finance current and future fiscal deficits beyond drawing down reserves at the General Reserve Fund. Also, the establishment of a sovereign yield curve will be important to stimulate capital project financing. The new law should strengthen Kuwait's sovereign credit rating.
CPI inflation slowed to 2.3 percent in April, reaching its lowest level since September 2020 amid continued disinflation in most CPI components but especially food & beverages (4.6 percent y/y), the main contributor to the post-pandemic inflation landscape. Housing services inflation was unchanged (0.7 percent) as was the core CPI rate (2.4 percent), despite a deepening in transportation price deflation (-1.1 percent y/y). - The external current account surplus narrowed in 2024 but remained large at 29 percent of GDP. Kuwait's current account surplus narrowed for a second straight year in 2024, to KD 14.3 billion (29 percent of GDP) from KD 15.8 billion in 2023.
This was driven primarily by weaker oil export revenues (-12 percent y/y to KD 21.1bn) and a recovery in workers' overseas remittances. Helping to partially offset a smaller merchandise trade surplus was a narrower services deficit due in part to lower spending overseas by Kuwaitis (for leisure, studies and medical tourism).Income (net) earned on foreign investments reached a historic high of KD 10.2 billion (net) in 2024, up 2.3 percent y/y and equivalent to 57 percent of the country's oil export revenues.
Domestic credit increased by a strong 1.3 percent m/m in April, the fastest monthly growth in three years, driving up growth to 5.7 percent y/y. Corporate credit growth, after 4 strong months, slowed to 0.2 percent m/m (5.3 percent y/y), while household credit grew 0.3 percent m/m, its fastest in 3 months. Credit was boosted in April by 'non-core' segments including securities lending, which may have benefitted from the rights issue of a local bank in April. Meanwhile, strong growth in private sector deposits pushed overall resident deposits up 1.6 percent m/m (6.0 percent y/y) in April.
Growth to turn positive
GDP is expected to rebound in 2025 from two years of oil sector-led declines and post growth of nearly 2 percent. The upturn will reflect both oil GDP growth turning positive (+1.3 percent in 2025 from -6.9 percent in 2024) as Kuwait begins restoring 135 kb/d of crude oil output withheld since 2024 in line with its OPEC+ quota obligations and improving non-oil sector performance.
On the latter, there are already signs of a recovery across various metrics in Q2 – such as the PMI, credit, and real estate activity (see Latest developments section above) – following a dip in Q1 that we believe partly reflected seasonal factors including Ramadan (which fell in March). This improvement strengthens our view that a pick-up in non-oil growth in 2025 to 2.5 percent (and higher in 2026) from 1.8 percent last year remains feasible.
Moreover, the initial downside risk to oil prices from weaker global demand has been offset by the fresh upside risk to prices from the escalating Zionist entity-Iran conflict. We still see the non-oil growth dynamic being shaped by a combination of government efforts to rein in the fiscal deficit and softness in consumer spending on the one hand, but signs of a pick-up in business and investment spending on the other.
Declines in consumer outlays – partly payback from a period of super-strong growth in 2021-22 but also tight control of government wage spending – may be close to bottoming-out, but we do not expect a sharp improvement over the coming year. Rising investment is reflected in higher project awards, stronger business credit growth, steadily increasing real estate activity and potential interest rate cuts ahead. Government efforts to speedup execution of key development projects will help, despite a small cut in budgeted capex this year.
One key upside risk to growth is the potential passage of the housing finance ('mortgage') law over coming months, which would trigger higher household borrowing and related consumer spending. However, the full impact of the law once approved will be felt more over time than right away, given the parallel requirement for a major infrastructure rollout. The housing finance law is one part of the government's plan to promote private sector growth and diversify the economy away from oil under the Vision 2035 agenda.
Fiscal reform
The government has made some important strides in addressing the issue of serial fiscal deficits in recent months. These include repricing government fees and services, hiking fines and penalties and the introduction of a 15 percent minimum top-up tax on multinationals from January 2025 in line with the OECD BEPS program. Moreover, spending in the FY25/26 budget was unchanged from the previous year at KD 24.5bn. Despite this restraint, we see the deficit widening to 8 percent of GDP from an estimated 4 percent in FY24/25, due to an 11 percent drop in oil revenues driven by a lower oil price of $70/bbl versus $80/bbl last year. This would be the tenth deficit in the past eleven years.
Improving fiscal sustainability will be a multi-year event, meaning another tight spending round and more revenue-boosting measures in FY26/27. Our forecast assumes the introduction of excise taxes on tobacco and sugary drinks from FY26/27, and VAT at 5 percent a year later, which together could yield 1-2 percent of GDP (versus expected non-oil receipts of 6 percent this year).
We factor in spending growth of only 1 percent per year this year and next, consistent with the government's push for efficiencies and savings across the public sector, and potentially some subsidy cuts. However, within the overall total we see scope for higher capex, which was cut by a cumulative 35 percent in the past four budgets to help address the deficit. Tight fiscal policy would inevitably weigh on demand and spending in the economy, but also cut the deficit to 6 percent of GDP by FY26/27 assuming unchanged oil prices. This would be broadly in line with the IMF recommendation of fiscal consolidation at a pace of 1-2 percent per year.
Passage of the public debt law in April (following an eight-year hiatus) provides increased flexibility in financing any future deficits and eases pressure on liquid reserve drawdowns at the General Reserve Fund, about which officials have warned in recent years. We see most of this year's deficit being financed by debt, with an initial focus on local debt issuance. Even if three-quarters of the deficit were debt financed, the government's debt-to-GDP ratio would rise to 9 percent, which is still very low by international standards. The debt law and progress on fiscal reforms more generally also helps to address concerns of credit rating agencies who have cut the sovereign rating since the pandemic.
Inflation moderate
Having recorded a gradual but broad-based decline so far this year, we see CPI inflation remaining close to current levels (2.3 percent) for the rest of 2025, weighed down by moderate non-oil growth and subdued consumer spending but potentially pushed up slightly by the impact of the weaker US dollar on local import prices. There is some upside price risk ahead from possible subsidy cuts or hikes in indirect taxes. The Central Bank of Kuwait is expected to lower interest rates (discount rate currently at 4 percent) at a more gradual pace than the US Fed over coming quarters, given its relatively slow pace of tightening in 2022-23. Futures markets now expect 50 bps of further Fed cuts this year and 50 bps in 2026.
Longer term, unlocking sustainably faster rates of non-oil economic growth will require a range of structural reforms (such as to the business climate, the labor market and public sector efficiency) and higher rates of investment – both areas where Kuwait has lagged its Gulf peers in recent years amid political and bureaucratic constraints.
The government formed in May 2024 has been more active on laws and economic reforms (especially fiscal policy) than its predecessors, though presentation of its multi-year work agenda was delayed in April 2025, around the time of major global market volatility due to tariffs. In the oil sector, earlier OPEC-related cuts have left domestic output around 20 percent below capacity of 3.0 mb/d, implying strong growth potential if global oil market conditions allow. State oil firm KPC plans to raise capacity to 4.0 mb/d by 2035, having recently completed a big expansion of the refining sector.
Key metrics improve,but regional conflict triggers uncertainty
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