Muscat: Economic growth in Kuwait is expected to be subdued at 2.5 per cent (real GDP growth) in 2016 in view of lower revenues from crude oil. However, non-hydrocarbon activity is expected to support growth on account of execution of various infrastructure projects after a series of contract awards in 2014 and 2015, according to Kuwait Financial Centre ‘Markaz’.
The lower fiscal break even oil price for Kuwait at $51.8 a barrel in 2016 will provide comfort to the fiscal balance, though it would be lower than fiscal surpluses registered before the fall of oil prices, says the study.
Kuwait with low debt and higher fiscal reserves, accumulated during periods of elevated oil prices, could resort to raising debt in the domestic market, international market or draw down on its buffers or a mixture of both as the rebound of the oil prices remain uncertain, the research note said.
Series of contract awards and accelerated implementation of Kuwait Developmental Plan is expected to support non hydrocarbon activity, whose growth is expected to be at 4.5 per cent in 2016. Muted earnings expectation and lack of near-term triggers for valuation multiple re-rating could result in yet another year of tepid market performance, it said.
Earnings of Kuwaiti companies, mainly the commodities and telecommunications are expected to deteriorate in 2016 and the earnings growth in banks is also expected to slow down. The valuation measured by P/E ratio at 14.4x looks high compared to other markets.
The report further said that market liquidity is at its lowest. Given the lacklustre performance of the Kuwait stock market during the last few years, the report does not see any major negative triggers while it also doesn’t see any major positive triggers with low oil prices acting as a dampener. Hence, the outlook remains neutral for 2016.
On the Kuwait stock market, indices registered negative returns as continued fall in oil prices and subdued corporate earnings growth weighed on the stock markets. In 2015, Kuwait Weighted index and the Kuwait price index dropped by 13 per cent and 14.1 per cent respectively. However, despite the decline, the report sees the valuations for Kuwait market are still at a premium compared to its regional peers.
Most sector indices in Kuwait financial market registered losses with varying degrees. Sectors which had direct linkages to the impact of lower oil prices in the form of subdued government spending, slower deposit mobilisation, moderate credit offtake were most affected. Oil & Gas index lost 32.7 per cent while financial services declined 24.6 per cent. On the other hand, service sectors such as insurance and healthcare were relatively resilient. Insurance sector gained 9.8 per cent while healthcare was flat.
Kuwait stock market suffered from one of the poorest liquidity in the region. Value traded declined by 45 per cent in 2015 as a result of which the stock turnover also declined to 12 per cent compared to 22 per cent in 2014, lowest in recent memory. Kuwait stock exchange is plagued by a series of delisting and the liquidity has successively worsened in the past three years. This probably is one of the lowest trading activities in its history.
Lack of initial public offerings (IPOs) in Kuwait is an added factor leading to lower liquidity levels and turnover in the bourse. Lack of retail interest and investor participation as evidenced by lower credit disbursals towards purchase of securities in the recent years has also reduced liquidity in the bourse. The report anticipates the value traded and turnover ratio to improve in 2016 aided by the low base effect.
Given the declining oil prices, the report anticipates the earnings from the commodity sector to shrink further in the fourth quarter of 2015 leading to lower corporate earnings in Kuwait. The report estimates the earnings in 2015 to be $5.07 billion compared to $5.45 billion in 2014.
The report’s forecast for Kuwait’s earnings in 2016 suggests a modest 1 per cent increase, mainly due to the better performance of the banking industry compared to other sectors. Banking industry is expected to grow at 5 per cent in 2016 with the revival of the investments to sustain the credit growth in Kuwait.
Earnings potential of Kuwaiti banks can help to offset the declining earnings in commodity and telecommunication, as banking industry contributes 50.2 per cent of total earnings in Kuwait. As lower commodity prices, especially oil, are expected to prevail in 2016, the report expects decline for commodities segment in 2016. Accelerated execution of various projects that were awarded as part of KDP holds key for revival of corporate earnings in Kuwait. As the growth expectations for corporate earnings are muted, the report rates Kuwait as neutral on earnings parameter.