Kuwait: A harbinger of Mideast deficits to come

With oil prices having plummeted, one should expect Middle Eastern oil exporters’ budgets to implode. What were budget surpluses will quickly turn to deficits, stoking civil unrest amongst the burgeoning masses. Very high population growth rates mean that many oil exporters must use government monies to support the domestic economy. However this becomes harder to do with revenue from oil decreasing.

Kuwait, which is one of the least populated oil exporters should serve as a harbinger of what to expect elsewhere regarding government finances.

Kuwait, which says it sits on 10% of global oil reserves, was pumping about 2.6m barrels per day but recent Opec cuts have reduced its output quota to around 2.2m barrels per day.

Spending in the first eight months was 7.9bn dinars ($28.7bn), less than half of the 18.966bn dinars ($69bn) in budget outlays forecast for the entire year.

That leaves a preliminary budget surplus of 9.8bn dinars ($35.7bn) although the budget projects a massive full year deficit of $23.5bn.

The surplus is expected to shrink considerably when the finance ministry makes the end-year accounting adjustments by including pledged spending which has not been registered so far.

The results, however, put Opec’s fourth largest producer well on track to post a budget surplus for the 10th straight year.

Local economic reports have said the budget surplus will be much smaller than initially forecast, and it is now estimated at around $10bn – down from the expected $40bn.

The reports indicated that the emirate will post its first budget deficit in the next fiscal year if oil prices do not rebound.

In the past fiscal year which ended on March 31, the Gulf emirate achieved a record surplus of 9.33bn dinars ($35bn).

Based on official figures compiled by AFP, Kuwait has chalked up a total budget surplus of 30.35bn dinars ($113bn) over the past nine fiscal years starting with the 1999-2000 year.

The emirate, which has foreign investments worth $264bn, has a native population of just over one million, plus $2.35m foreign residents.

In countries like Saudi Arabia, which suffers much more from population growth problems this turn of events will be more damaging. Expect these countries, therefore, to have less to spend on foreign assets going forward, which I believe is bearish for western asset markets.

As for the domestic economies in the Mideast, this paragraph is a telling statement (my bolding for emphasis):

The oil-rich emirate’s revenues have been declining since peaking at $12.9bn in August as the price of Kuwaiti oil, which makes up 95% of public income, dived to $35 a barrel from around $140 in July.

Kuwait hurt by oil price plunge – Fin24, South Africa

  1. Nick von Mises says

    Care to draw conclusions on what this means for the global jihad and a possible Peak Islam / Peak Terrorism?

    1. Edward Harrison says

      @Nick von Mises, long time no hear! Well, Nick, I wouldn’t dare hazard a guess because the volatility of the situation renders any guess/prediction useless. Saudi Arabia is the prime example. They have an enormous population of young men who need work. With oil prices at 4 1/2 year lows, many of these individuals are unemployed or soon to be so.

      Were I to guess, I would say that a bunch of unemployed 25-year old viral men sitting around twiddling their thumbs is NOT good for Saudi Arabia. It is probably not good in terms of Peak Terrorism either. How that plays out on the streets of Cairo or Ryadh is anyone’s guess. I say it won’t be good.

      What is your thinking?

  2. tokyo joe says

    The Saudi population in 1982 was about 4.5 million. Today it is over 20 million. That means lots of young people. Lots. And they do not have meaningful work, which in Saudi Arabia means being able to sit behind a desk and keep your thobe crisp the whole day. Labor is for Yemeni or Sudanese or Pakistani imports. And in a land where the term ‘conspiracy’ reigns supreme (mughamarah), whom do you think all the young shebabs will blame for the collapse of the oil economy?

    The second concern, wholly different, is how will the decline of ME economies impact the funding of the US deficit? Already massive numbers of migrant workers from SE Asia are being sent home from the construction sites of once cash rich countries such as Qatar and the UAE (Dubai and Abu Dhabi). With China spending on its own stimulus, and the resource countries now short of cash (Russia and the ME), funding the US deficit will be problematic.

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