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