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Kuwait: Current Account Surplus Expands in ‘10

Middle East : 29 July 2011

Source: Arab Times

The 2010 current account recorded a large surplus, albeit smaller than in the pre-crisis years. The trade surplus expanded as moderate growth in imports was more than offset by a strong jump in exports, driven by rising oil prices. We estimate the surplus at 29% of GDP, after 24% in 2009. The capital and financial account continues to see a net outflow as Kuwait increases its stock of foreign assets.

Current Account:
The current account surplus rebounded in 2010 as the effects of the financial crisis waned. The current account surplus was KD 10.6 billion in 2010, an increase of KD 3.1 billion from 2009, putting it near its 2007 levels. It is also expected to have grown faster than GDP, taking its share of GDP to 29%, up from 24% in 2009.

Generally, individual components of the current account exhibited a trend of slight improvement – either a decrease in deficits or increase in surpluses. Nevertheless, certain components are worth a closer look.

Revenue from oil exports – the major contributor to the current account surplus – increased by a third, reaching KD 17.7 billion thanks to higher oil prices and to strong global demand. As for non-oil exports, they exhibited a smaller increase and therefore made up a smaller share of all goods exported in 2010. Non-oil exports made up 7.9% of all exported goods in 2010, down 1.9 percentage points from 2009. This highlights the fact that further work needs to be done in order to diversify exports away from oil.

Turning to imports, the year 2010 saw an increase of 9.9% after shrinking 19.3% in 2009. This turnaround reflects the weakness in the economy in 2009 and the subsequent recovery last year.

Imports had previously grown pre-crisis (2001-2007) 14% per year on average. Moreover, they should continue to expand as local demand picks up further in the current recovery. Overall, Kuwait continued to be a net exporter of goods with exports 3.5 times the size of imports. Imports were 3.6 times the size of non-oil exports. The services balance stood at a deficit of KD 1.7 billion, with the biggest chunk of this deficit going to travel services.

The deficit on current transfers – which is mostly worker remittances – saw a mere rise of 0.4% year-on-year to KD 3.7 billion. However, transfers data often undergo revision at later stages and therefore it is possible that transfers will eventually be shown to have risen by more as the number of expatriates in the workforce showed some increase in 2010.

In investment income, net earnings from international financial assets increased in 2010 by 11.5 % (y/y), to reach KD 2.3 billion, after they had taken a hit the previous two years. Earnings have not yet returned to the pre-crisis high of KD 3.5 billion, but the trend should continue to head upwards if the global economy and financial markets continue to improve.

We note here that at KD 2 billion (or 91.8% of income), the government was the largest recipient of investment income. In fact, the government has taken an increasing share of the investment income flowing into Kuwait. This has been at the expense of investment companies and other private sector entities, except for local banks, which have also seen their share increase over the past few years. Investment companies reduced their assets in the wake of the 2008 crisis. In 2006, the government, combined with local banks, received 69.3% of total investment income. Their combined share reached a massive 98.0% in 2010 (chart 3).

Capital and Financial Accounts:
The combined capital and financial account saw its traditional outflow – the flipside of the massive current account surplus. This outflow, which had dipped in 2009, increased again in 2010, reaching KD 9.3 billion.

Direct investment remains a net outflow, representing a net increase in Kuwait’s foreign direct investment (FDI) abroad. In absolute terms, both inflows and outflows shrank in size in 2010. The primary reason for the decrease in FDI outflows was the government’s reduced direct investment overseas.

The inflow of FDI stayed in normal historical ranges at KD 23 million. This figure has traditionally been very small, which is in part attributed to the fact that Kuwait does not lack capital and typically only relies on foreign direct investment for administrative and technical expertise. Nevertheless, this highlights the low attractiveness of the country as a destination for FDI compared to other GCC countries, something that the authorities plan to improve.

The net outflow of short-term foreign investments (portfolio investment) witnessed a slight downward movement to reach KD 2.2 billion in 2010. This follows a major decline in the previous year, when portfolio outflows went from KD 7.6 billion to KD 2.4 billion in 2009. (In fact, 2009 was initially reported as a surplus/inflow of KD 2.2 billion, now revised to an outflow of KD 2.2 billion.) The driving force behind this shift was government since it is the biggest contributor to net portfolio investment, with local banks and other private sector institutions only contributing 12.6% to portfolio investments abroad. This major change from 2009 onwards might indicate a more cautious approach by the government in light of volatile global financial markets, as well as some pressure to invest locally (via stock portfolios and the recent KIA Kuwaiti real estate fund).

Other Investments – made up of trade credit, loans, currency and deposits, as well as other instruments – remained a net outflow with a jump from KD 3 billion to KD 7.2 billion. The main factor for this change did not come from government, the central bank, local banks, or investment companies but rather from a change in currency and deposits in other sectors (other private sector entities) which went from a net inflow of KD 1.3 billion in 2009 to a net outflow of KD 1.3 billion. This item may reflect large repatriation of funds in 2009 to help liquidity in the financial system and a reversal in 2010 as the system had ample liquidity. (Furthermore, this item is prone to large revisions after the initial report).

Reserve Assets and Others:
The Others (Net) account, – made up of errors, omissions, and private capital flows not reported by financial institutions – recorded a net outflow of KD 1 billion, which is not beyond the ordinary given the residual nature of the account. Meanwhile, the Central Bank of Kuwait accumulated reserve assets for the seventh year in a row, reflecting a surplus in the total balance.

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