Kuwait now expects to post its first deficit in two decades by 2017, Finance Minister Anas Al Saleh has reportedly told the Kuwaiti Parliament.
Al Saleh said the recent decline in oil prices, which account for about 90 percent of export revenues, would see Kuwait fall into the red sooner than the International Monetary Fund (IMF)’s 2017-18 prediction, according to Kuwait Times. [Source]
The price of oil is currently under $40 and Kuwait needs it to be at $78 to pay all its bills and stay in the black. So can an expert tell me what it would mean for us if Kuwait ends up in the red? Does everything continue as it is while the government digs into its savings until the oil price goes back again? Or would some of the amenities like free health care stop to help cut down costs? Will this cause inflation?
67 replies on “Kuwait to Start Losing Money Soon”
The budget is very wasteful, but there are many remedies for eliminating this waste:
Remove Subsidies, introduce Taxes, lower the population by reducing reliance on expats.
And of course, you can always devalue the Dinar. Cheaper Dinar means more Dinars for the same barrel of oil.
well i doubt any of that will happen by next year so my question is what will happen once we hit red.
No… Everything will be the same. If anything happens it’s because they found a reason to do all the nasty things they’ve been trying to do for the past 20 years (Taxes in, Some of the Subsidies out).
FYI, Japan has been reporting a deficit every year since the early 90’s.
Yeah exactly. They want the oil price to stay low so they can introduce taxes and cut subsidies. Then when the price is back to profitable the taxes will stay high and the subsidies will stay cut.
The theory goes, if the government is taxing its citizens, then they will be more responsible when deciding their legislative representatives (the MPs). After all, they will be electing someone who will be responsible about how their hard earned money is spent.
It might be a good thing after all.
Once we hit red, the government will start taking money from the sovereign wealth fund or from the foreign-exchange reserves.
Kuwait has two options: the foreign-exchange reserves and the sovereign wealth fund
Yes probably reduce some subsidies too.
Or the option every other country in the world uses, borrow money
It is already happening, some subsidies were already removed (Diesel) and others are being planned such as on petrol and electricity. Low oil prices helps the government implement these reforms with little resistance, I hope they continue with this.
If these measures are still not enough and there is still a budget deficit, then the government withdraws from the huge reserves as it did many times before. They should last for many years.
Once we run out of reserves, then devalue the Dinar. This will leave the government more wealthy, and less of its budget will go to paying wages, making everyone poorer.
Kuwait still has plenty of oil, and the global need for it will not suddenly stop. But the wealth it generates will spread out, and the quality of life here will be slowly reduced.
competition between oil producers(opec vs us shale vs russia) bringing down the oil price to less than $50. More supply and less demand = decrease in oil price
slowed growth of developing/developed countries(therefore decrease on oil imports eg.china)
global conflicts. (us/eu vs russia) and saudi(thinks they have a lot of oil reseves) is aiming to bring the price of oil lower to hurt other oil exporting countries(and kick them out of the business). they also said that they will not cut oil production. lol
if Kuwait’s main source of income is only oil(90%), then, this land is practically dead unless it comes up with an excellent solution. how long will foreign-exchange reserves and the sovereign wealth fund last? how much is Kuwait’s govt willing to use? how will devaluation of money make a government wealthy? if the value of KD decreases, then you’ll need more KDs to purchase $ which is used to purchase things internationally. other countries would need less $ to purchase oil from Kuwait.
once Kuwait hits red:
1. decrease in Govt’s budget = decrease in Govt spending
2. definitely, decrease on imports of goods(food, manpower, infrastructure materials etc) + a growing population. there will be increase in prices of goods(+inflation) so the residents will feel KD is losing it’s value. harder to set up a business because manpower cost is high. less reliance on expats, you’ll have to do the job.
see how russians were affected.most of them use to spend xmas/bew year abroad before. now they prefer to spend it at home.
these are just my personal opinion which is basically base on what i’ve learned about global markets and personal experience while trading stocks.
The foreign-exchange reserves and sovereign wealth fund can last for several years, plus Kuwait has other sources of income (the money of sheikhs and merchants).
A reduction in govt budget won’t make a difference. Kuwait has never spent what it has budgeted. In the current fiscal year, Kuwait was supposed to spend KWD 23 billion but it spent KWD 7-8 billion only
You are assuming that the income from oil will become $0. This will not happen any time soon. There will be a significant income from oil for the foreseeable future.
However, If oil continues to be cheap, then of course there will be a decrease in the “luxury” of life in Kuwait, but the country will not suddenly turn into Somalia. We’ll just buy less iPhones and Porsches and expensive brands, travel less, and spend more on food and our utility bills.
The growing population due to births will be offset by expats leaving the country, which is currently standing at 4 million, as opposed to Russia’s 150. Russia produces 4 times more oil than us, but have 35 times more people.
So, I think we’ll do fine.
no, i did not assume that. i was just telling that if oil is the only source of income of Kuwait, then it will be disastrous later on.
you’re right, the citizen will have to adjust and be more prudent eventually. the problem is, how long will it take for the citizens to adjust?
we’re also talking about competition here. if oil prices drop further, then you’d have to sell your oil lower to compete against Saudi and other oil exporters.
i think Kuwait stock index has dropped 15-20% in the past few months. if it continues to go down, foreign investors will definitely move to another country.
Less spending of gov’t ,citizens, expats = not attractive to investors
decrease FDI =
1. Malls will be emptied
2. Properties(land) will decrease in value(less occupants, more housing space)
3. less workforce, less expats(they will find a more suitable place to work)
4. gadgets/cars will be more expensive
btw, we cannot include the money of sheikhs or private individuals to the govt’s budget. do you think they are willing to spend their money for you?
these things will happen in worst case scenarios. future really depends on how Kuwait gov’t will handle the present situation. also, economic boom in a country is cyclical. who knows, the price of oil might go up again in the future:
https://www.wsj.com/articles/worlds-largest-traders-use-offshore-supertankers-to-store-oil-1421689744?mod=e2fb
see what foreign investors are doing? buying oil while they are cheap, hoarding them for sometime then selling them once the price goes up again.
I am actually hoping for #2 (properties decrease in value). I have been hoarding cash for quite a while to buy a property for a reasonable price.
You devalue currency against another currency, you can’t devalue the Dinar against the Dinar. Not how it works..
I know how it works. You devalue against the dollar, the government gets the same amount of dollars from selling oil, but converts them to more dinars. It then pays your salary with a cheaper Dinar. This is how the government will trick you into lowering your salary, if it comes to this.
There are dozens of tricks they can do so we can get along with our lives just fine. There is no reason to panic. Really. Shit is not going to hit the fan any time soon. Calm down and move along.
that is a bit wrong..
Kuwait does not produce dollars, it produces KDs.
in order to buy things abroad, you need to use dollars.
IF you decrease(devaluation = intended/depreciation = not intended) the value of KD, then you need to USE MORE KDs to purchase DOLLARS.
the Gov’t might not decrease your salary PHYSICALLY, but you will feel that you money has less value(because people imports goods abroad at a higher price/ +inflation).
I’d like to elaborate more, but it is quite technical and i’m having difficulties in explaining it layman’s term.
don’t worry, be aware, equip yourself with knowledge. it’s not the end of the world.
That’s correct. Kuwait pays salaries in KDs, which is a very big chunk of the government budget. If it comes to it, the government will devalue to reduce the size of this chunk.
I understand the consequences of the KD being cheaper. Less purchasing power for me as an individual, but the government will still have same amount of USD, because the government gets paid in hard currency for its oil.
Kuwait has never spent what it budgeted. In the current fiscal year it was supposed to spend KWD23bn but it spent KWD7-8bn only …
A couple of new burger joints and starbucks should do the trick
HAHAHAHAHAAHAH.
This man is what this country needs. We should put him in the Parliament asap.
I think the sovereign wealth fund can cover this short-term dip though.
It’s currently estimated to be worth US$548bn, (KD160bn,) and much of that investment is spread fairly widely.
correction: oil is in @$50
It will Obviously need to cut on the Subsidies…This is actually good for the country in the long term as it will push the Gov to fix the economy…From past experience I think the expats will take the biggest hit…
The government doesnt need to dip into the sovereign fund, it just has to act like all the governments in the world when the need to finance the deficit, they need to borrow ( whether by issuing bonds or from banks).
Albeit substantially lower, 40$ is still a profit making price. Remember that oil in kuwait costs less than 10$ to produce. What the government must do is reduce it’s yearly budget by cutting spends on unnecessary items like bonuses and “unrelated items” that usually goes to corrupted pockets and introduce a few tax laws to exploit the current situation until at least the main goal of maintaining that price is achieved whatever that goal is.
well it would be a hyperinflation i think,as nothing is made here,everything is imported.food products will be very expensive and soon after it hits all the expats will start flying away as there is no benefit living here.
Wages will go low,everything will become expensive,our rents will go much higher and we will dream about today as the landlords will want to cover their expenses,KWD will be depreciated,stocks will fall.
small businesses will be hit very bad resulting in close down and this time there will be nothing the government will be able to do.
Then i think Kuwait might go for IMF loans.and then the oil rich country will be in 100% control of IMF. Inshallah that shall not happen as Arabs are strong to live only on dates and camel milk.
I disagree with you about the rents. Landlords cannot charge you high rent if you don’t have the means to pay it. Their properties will simply go vacant, which means 0 income for them. They will have to lower their prices to the point that people are able to pay, even if at a loss.
Landlords will have to chose between a small loss, or a MASSIVE loss due to 0 income.
Falling incomes are always followed by falling property and rent prices.
What’s with so many people talking about expats leaving and decreasing expats and what not?
It really shouldn’t be that way as if it wasn’t for expats there wouldn’t be half the stuff that exists here in kuwait. Who will make your food? Who will build your buildings? Who will do 90% of the things done in kuwait? Your so quick to get rid of the ‘expats’ and send them away that you forget this country was basically built on their backs..all kinds of expats from philipinos to Indians, egyptians, Jordanians, Lebanese. Beleive me if these expats leave no Kuwaiti is going to fill their jobs with a smile on their face, especially when it comes to flipping burgers, or cleaning, or even doing the standard desk jobs.
And for the record, there are very intelligent, diligent and great Kuwaiti work force in some cases but do you think that’s enough to sustain this country, maybe like 10% of it, if not less..so maybe your solution is not to get into the mentality ‘This money is all mine, leave me’ rather they should probably develop a stronger expat/Kuwaiti workforce to make something out of the country, not chop away excess til your left with only your desert and no one that even wants to come work here.
And once your money is out..oh my what’s going to happen…diseases, wars, broken infrastructure, and a devestated economy that will only leave the criminals and thieves standing to control your fate..good luck because with this mentality this is where your headed.
Woah.. diseases AND wars? Will it be a Michael Bay production, too?
Wow that’s a bit dramatic, “If you fire expats you will have wars and devastation”
I agree that expats are not the drain people make them out to be and are actually a necessary part of the workforce. However you make a huge mistake when you argue “Who will flip your burgers and clean your streets”, because you’re devaluing the expat contribution saying that, reducing them all to janitors. I see this mistake made by expats complaining about Kuwaiti policy a lot. There are expat engineers, bankers, CEOs that are probably better role models
Look, Kuwaitis don’t want to get rid of expats. Most Kuwaitis don’t care whether expats are here or not. We really don’t mind, come and go. The government of Kuwait wants to reduce the expat population.
Expats are 68% of the total population in Kuwait. Kuwait does not need this many expats. There are many expats in Kuwait because Kuwaitis are lazy and demanding. The average Kuwaiti family has 2-3 maids. The current lazy Kuwaiti lifestyle is unsustainable and needs to change. Eventually, Kuwaitis are going to have to start working in the service industry, taking the jobs that expats are currently doing right now
In Saudi Arabia, most of the private sector is expats but expats are only 10% of the total population of Saudi Arabia. In Oman, most of the private sector is expats but expats are only 45% of the total population.
This is about sustainability.
I would like the expat population to be reduced. I don’t hate expats. I want Kuwait to rely more on its own citizens.
I don’t mean bother anyone with what I said and I’m defintetly not debating this matter because it’s pointless to do so,, but I’m just saying to those who say it, it’s insulting to say let’s get rid of the expats, as if expats are some kind of extra piece of junk lying around.
The economy is built upon expats. If you remove expats. No one will buy shit, no one will live in the expensive apartments. What people don’t understand is the economy needs people to buy shit to keep going. If you reduce people, people buy less shit. If expats keep their wives and children in other countries they buy less shit here.
Most countries in the world operate on a deficit year to year. The US is $18 Trillion ($18,000,000,000) in debt. You start borrowing from other countries and banks essentially.
Most countries don’t actually have a surplus at the end of the year either.
Sadly mistaken! If you can support a family and hence a car also, make the calculations. Expats don’t get children allowance, extra housing allowance, no free education, subsidized food. If you can’t afford a car then extra money traveling to and fro from work, 99% a big joke maybe 1% other way around. New wave of expats are around, since equations have changed, maybe they can afford 20-25% max.
Sorry! This was a reply for crazyinkuwait.
keep not paying workers at the lowest level. so far so good with that1
A lot of the expats send 99% of their salary back home and live minimally in Kuwait maybe that’s why they are picking on the low wage earning folks. In the papers it says they want to raise the dairy prices by 30% so those bowls of cereal will cost a lot more soon.
do you even know 99% is 100-1 . if expats were to send 99% of earning what do u expect them to survive here on air only and stay on streets and travel on foot. 1% of 1000kd salary would mean 10kd… show me a 1000 kd person spending only kd 10 here.
instead i would say a average expats uses only 1% of his salary on subsidized goods.
wow that statistic sounds like you pulled it straight out of where the sun dont shine. Totally fabricated. Yes many expats send a bit of their salary home but subtract rent and food and living expenses and there isnt really a whole lot left CERTAINLY not 99 percent. Head out of clouds please.
There are expats in Kuwait that on a daily basis spend more money than the average Kuwaiti family, I know of quite a few such individuals, they drive around in much fancier cars, Merc S-Classes, Range Rovers, they wear expensive clothes, you name it, they’ve probably got it, I wonder if that isnt giving back into the economy, then what is?. Generalizing wont solve the problem, if you want to raise prices, reduce subsidies then you HAVE employ a decent minimum wage for the foreign, create incentives for an expat to give back to the economy by introducing 99 year lease programs for expats on property and real estate, give them more than 49% stake in own businesses, it will solve most of your problems.
Wait and see the car and yatch bookings before making any conclusions … auto-expo and yatch-show running. National wasteful expenditures will continue. Change won’t happen till people are made to earn their living, not live on state financing. Cradle to grave still in force.
“Does everything continue as it is while the government digs into its savings until the oil price goes back again?”
In addition to the savings, we have income from our sovereign wealth funds. The current oil prices are strategically reduced for political reasons. Permanent damage to our assets can be avoided.
In any case, the official budget is calculated at $78 however I believe that was done in times when the oil prices were around $100 to allow surplus. There is a secondary “true” budget which is done based on oil prices around $43-$45 and this kind of details are local way of doing things and IMF doesn’t go into that detail.
Prices of oil will eventually go up again. Since the US found a new technique called fracking to extract oil, deposits where found. Opec can control the prices of oil easily, however, they are playing the waiting game. Since fracking oil reserves tend to finish and are minimal. Also, fracking requires money and exploration. When US finishes all their oil reserves or start to loose money out of extracting and exploration . Oil prices will boom back up. Its jist that surplus of oil has caused this large decline in prices.
prices will not go up again like before, it will reach a maximum of $55-60……stop having false hopes dude.
US , Canada & western countries have invested big time on Hybrid technology and already 10% of all cars manufactured currently are Hybrid(which reduced oil consumption by 75%) …..in 10 years time Western demand for Gulf oil will reduce by 50%.
First of all, hybrid cars and all that useless technology will take years to implement. Id say 20 years or so since hybrid cars will become a thing is they require electricity which is powered by oil or nuclear energy. Have you ever thought what are the uses of oil are? Its not just for cars bro. If you think about it, you need oil to power electricity, cars, airplanes, trains, all vehicles. Also you have plastics, even frames of prescription glasses are made out of oil. The demand of oil will never run out and prices will eventually come back up. Plus, 75% of the crude oil exports of Kuwait are to china my friend. As I mentioned before, it is true that OPEC is loosing money right now by selling cheap oil, however, they are strategically playing a game by patiently making other competitors such as the US run out of money for exploration. However, oil prices arent easy to predict, so its just a matter of time for the prices to come back. In my personal opinion, Id say 6-7 months.
I think you don’t have much knowledge on hybrid technology and its impact on fuel savings. Your statement telling “useless technology will take years to implement ” shows how immature you are regarding this. Point 1- hybrid Cars started way back in 1999 in very small numbers and by 2005 in USA alone 220,000 cars produced were hybrid.In 2014 this amount raised to 600,000 and worldwide production is almost a million This shows you are cutoff from the real world. The world is not sleeping for their future like you Kuwaitis might be. Hybrid technology is successfully implement 12 years ago, the fruits are coming and will increase substantially in the next decade. . Countries like China, brazil and others have also started investing big time on hybrid https://cleantechnica.com/2014/08/27/chinas-electric-and-hybrid-vehicles-production-up-280/.
Oil consuming countries like USA ,China and others are not stupid to keep dependency on oil in future as it consumes a big part of their imports.
Point 2.- Yes Oil has many uses besides cars. But automobiles consume 80% of the requirement or more. So hybrid tech will cut down imports big time after 10-15 years in many nations.
Kuwait was to go into RED even at $105 level by 2020, it’s just happening early now. I am not Economist either but I am aware.
There is currently an oil boom in the US. It’s just temporary and everything should be back to normal, once it stabilizes.
But even Kuwait WILL eventually go in the red, when this happens:
Govt subsidizes must go down, and taxes introduced.
KD power will drop, not very significantly though
Expats will become less
Overall Kuwait is just going to become an unspoiled country :p
A few cupcake stores and instagram fashion store should do the trick…
When over 90% of all Government revenue comes from a single source, what did you expect to happen? I’m no economist, but even I can figure that out.
It’s obvious that you’re no economist.
Kuwait has the lowest budget breakeven price in the Gulf, therefore it’s more safe than other Gulf countries:
https://www.meed.com/sectors/oil-and-gas/impact-of-falling-oil-prices-on-kuwait/3197962.article
Kuwait also has large savings, sovereign wealth funds and foreign-exchange reserves
Economists are saying that Kuwait is well-prepared for low oil prices.
Oil will remain low in price as per most forecasts. The days of Luxury, exploitation and racism will come to an end sooner than thought….the world is moving towards hybrid tech. to reduce dependency on oil…Masalama Kuwait…all your treasury will be over in a decade or so.
Economists are saying that Kuwait is well-prepared for low oil prices at a prolonged period of time:
https://www.meed.com/sectors/oil-and-gas/impact-of-falling-oil-prices-on-kuwait/3197962.article
Wow, never knew Kuwait had so many economic experts.
And yes, they raid the kitty to pay for any shortfalls.
I read an article last night (forgot where) in which basically what I understood, OPEC wants the prices to fall so that the poorer oil producing countries fall, OPEC has a lot of competition and right now they’re selling oil at a loss (figuratively speaking) knowing they have enough financial reserves to hold them out longer then their competition.
Pretty smart and business savvy honestly.
May be “smart and business savvy”, but it is called predatory pricing strategy and is illegal in most economies. Of course it can’t apply here, oil producers can do whatever they want.
“Illegal” despite Walmart practicing it and becoming the largest revenue making company in the world thanks to it. It’s a business reality that this happens everywhere despite laws
also Amazon
Guess I’ll have to go buy a bicycle to go to college from now on with lol
Can anyone kindly explain to me what it means for a country to go red? Been hearing that alot on here 😛
Thansks!
As the government has been running in surplus for quite some time, I don’t think there is reason to panic.
The most likely consequence of all this is that the government will delay in the launch of major infrastructure projects (like the airport, LRT, etc.). The capital expenditure will decrease; but the operating expenditure will remain the same.
That is, the salaries, government ministries, etc. will all remain as is (as this is operating expenditure) but expansion and new projects *may* be delayed; should the price keep dropping.
Of course the next fiscal budget will not change its predictions (because this requires a lot of forecasting and work).
If the slide continues (highly doubtful) then the government will start first by reducing subsidies on goods.
Believe me, the last thing the government wants to do is implement tax; because administering tax is a HUGE burden on any government.
The price of petrol has an indirect impact on the price of imported goods; but it does not deflate the currency unless you start devaluating it (which is a drastic step, and not something taken lightly).
People should not panic in the short-run, we are pretty covered. However, people should panic in the long-run. About 90% (I think even more) of our economy is based on oil production. We import mostly everything from outside, which is bad.
Some people say not to worry because we have oil reserves till 2100. That is silly, once scientists find an efficient way to use green energy, oil prices will decrease even more. I suspect in 10 to 15 years they will because most countries are recognizing that global warming is a threat.