ECONOMIC SPOTLIGHT - KUWAITI ECONOMY
Kuwait's oil-reliant and debt-ridden
economy has started to pull out of a nosedive but oil prices
will determine the pace of recovery, bankers and economists
say.
    Crucial will be the ability of the 13-member OPEC to hold
oil prices around a new benchmark of 18 dlrs a barrel in the
northern hemisphere summer when demand usually slackens.
    Bankers estimate the economy, measured in terms of gross
domestic product (gdp), shrank 19 pct in real terms last year
after contracting 8.1 pct the year before.
    This was after taking into account inflation in consumer
prices of 1.5 pct in 1985, slowing to 1.0 pct in 1986.
    Factors depressing economic activity include the
6-1/2-year-old Iran-Iraq war on Kuwait's doorstep, which
threatens the emirate's vital oil export lifeline through the
Gulf and has sapped business confidence.
    But sentiment received a much-needed boost in September
when, after a series of piecemeal steps to combat a debt crisis
caused by the 1982 crash of local stock market, a comprehensive
new debt settlement program was introduced.
    The share crash, result of a speculative spree in forward
trading, left 95 billion dlrs of post-dated cheques in default.
    The cheques were also used as collateral for consumer
spending, thus generating an informal credit system.
    Much of the debt has been watered down but big sums are
still owed by individuals and companies.
    There was some 4.4 billion dinars (about 15.7 billion dlrs)
in outstanding bank credit at the end of 1986, of which
one-quarter to one-third was estimated by bankers to rank as
bad or doubtful debt. But the government has repeatedly said it
will not allow any banks to go under.
    The new debt settlement scheme entails a rescheduling of
problem credit over 10 to 15 years, depending on whether
debtors have regular cash flows or not.
    Banks' shareholders and depositors will have their rights
guaranteed by the government -- an edict of vital significance
in a country of only 1.7 mln people where the financial sector
is the biggest after oil.
    Kuwait is better placed than any other OPEC country to ride
out the oil glut, bankers and economists say.
    Kuwait has an OPEC quota of 948,000 barrels per day (bpd)
compared with production capacity of 4.0 mln bpd mentioned last
year by Oil Minister Sheikh Ali al-Khalifa al-Sabah.
    But strategic diversification into downstream operations in
Europe several years ago and a hefty refining investment at
home gives it guaranteed markets abroad and enables it to sell
over one-half of its output as high-grade refined oil products.
    Oil industry sources say Kuwait is able to get an average
2.00 dlrs a barrel more by selling oil in the form of processed
product such as gas oil, kerosene and naphtha, rather than as
crude.
    Bankers say the rebound in oil prices is the major reason
for cautious optimism. Other reasons are low domestic
inflation, a bottoming out of the fall in imports in recent
years and signs government spending on productive sectors will
remain steady.
    External accounts are in good shape, with an estimated 1.8
billion dinar current account surplus in 1986, 16 pct below
that for 1985, but still an achievement in the recession-hit
Gulf.
    Kuwait's petrodollar reserves in mid-1986 were put
officially at over 80 billion dlrs, earning investment income
of the equivalent of about 3.65 billion dlrs a year.
    But for the first time since the end of the oil boom, these
reserves may not be enough to prevent a "real" budget deficit for
the 1986/87 fiscal year ending June 30, bankers say.
    In a budget portrayed by bankers as mildly contractionary,
revenues for 1986/87 were cut 38.6 pct and spending 11 pct,
doubling the nominal deficit to 1.33 billion dinars.
    This left out income from state reserves, usually excluded
in official budget accounting, which are forecast by bankers at
up to 1.0 billion dinars in 1986/87, resulting in some
shortfall.
    Bankers say it is too early to venture a forecast for
economic growth this year or next.
    "It depends on oil prices," one said. "This summer is
important."
    Cabinet Affairs Minister Rashid al-Rashid said last Sunday
the cabinet has ratified recommendations to rationalise state
spending in favour of productive sectors and reactivate the
economy.
    He gave no details but bankers say these are expected to be
spelled out in the 1987/88 budget, possibly in June.
 REUTER
