NBK: Kuwait's Economic Activity Recovers Despite Regional Conditions

The Kuwait Economic Brief issued by National Bank of Kuwait revealed an economic recovery despite ongoing pressures linked to the Gulf conflict.

In its report, the bank stated that the Kuwaiti economy showed clear signs of resilience despite the ongoing conflict and persistent disruptions in regional trade and shipping routes. Several key economic indicators have recovered from the lows reached in earlier stages of the conflict, suggesting that the economy has largely absorbed the initial shock, although conditions have not yet fully returned to normal.

Non-oil activity improved despite headwinds stemming from trade disruptions, project delays, and general uncertainty associated with the conflict, supported by government measures, stable household incomes, and easing inflationary pressures. Meanwhile, oil production rose to three-quarters of its pre-conflict level. As more shipments pass through the Strait of Hormuz, Kuwait is better positioned to benefit from higher oil prices compared to the early stages of the conflict.

The improvement in economic data reinforces our previous view that the non-oil economy will avoid a sharp slowdown. Although we lowered growth forecasts compared to June to reflect revised assumptions regarding the conflict, the recent recovery across most economic indicators provides greater confidence that growth will continue to recover as regional conditions stabilize, supply chain pressures ease, and investment and project implementation accelerate.

The report also addressed the new law allowing the government to borrow from the Future Generations Reserve Fund, noting that it permits the government to borrow from the sovereign wealth fund, whose assets exceed $1 trillion, to enhance liquidity margins, but within strict controls. Under the law, the borrowing ceiling in any fiscal year is set at 100% of the fund’s average investment returns over the previous five years, while the total outstanding loan balance cannot exceed 10% of the net asset value of the reserve, implying a loan balance cap exceeding KD 3 billion.

The law requires the state to prioritize loan repayment from future budget surpluses. Following the approval of the Financing and Liquidity Law in 2025, short-term financing needs rose rapidly amid a significant drop in oil revenues due to the regional conflict. While borrowing from the Future Generations Reserve Fund provided a new channel for raising funds, the government continued to tap local and international debt markets during the third quarter, raising KD 600 million from the local market and the equivalent of KD 1.8 billion from international markets. Consequently, a total of KD 4.3 billion has been raised from debt markets so far in the current fiscal year (2026/2027).

The report noted that the sharp decline in oil revenues, combined with spending on conflict-related costs, including subsidies and capital expenditures for reconstruction, will result in a fiscal deficit of approximately 20% of GDP (KD 9.6 billion) in fiscal year 2026/2027, wider than the 15% of GDP deficit recorded in fiscal year 2025/2026.

This deficit marks the eleventh such shortfall over the past twelve years and the largest since the 32% of GDP deficit recorded during the “COVID-19” pandemic. Nevertheless, the financial situation is expected to improve significantly in the 2027/2028 fiscal year, potentially approaching balance, assuming a recovery in oil production and exports alongside a decline in spending related to post-conflict reconstruction.

The government is also expected to refocus on its public finance consolidation agenda after a period of high spending pressures. This includes continuing efforts to boost non-oil revenues, particularly through ongoing reviews of government service fees and the introduction of new tax measures, likely starting with a selective excise tax in 2027 before transitioning to a value-added tax.

On the spending side, measures under consideration include subsidy reforms and further targeted cuts in estimated expenditures. Public debt has risen since March 2025 following the enactment of the Financing and Liquidity Law, but the pace of borrowing should slow next year due to reduced financing needs (assuming an improvement in the financial situation) and the new law allowing borrowing from the Future Generations Reserve Fund. A new sukuk law will further diversify borrowing options, and we expect public debt to reach approximately 23% of GDP in the 2026/2027 fiscal year, with a likely slowdown in issuance rates given the possibility of accessing financing from the Future Generations Reserve Fund.

Fitch Ratings views this type of borrowing as government borrowing from another government entity, and thus it will not be included in the public debt figure. Overall, fiscal space remains comfortable, with the debt burden remaining low by global standards and ample room for additional borrowing exceeding 30 billion dinars from the Future Generations Reserve Fund. This effectively raises the aggregate government debt ceiling (public debt plus loans from the Future Generations Reserve Fund) to more than 60 billion dinars, compared to approximately 11 billion dinars in current issuances. Increased liquidity will further accelerate economic diversification projects, driving progress toward long-term development goals and stimulating non-oil sector growth.

The report noted that real estate sector activity continued to improve in July, with property sales rising to 395 million dinars, the highest level since February 2026. Sales increased on a monthly basis across all sectors, led by the investment sector, followed by the commercial sector. Residential sector sales saw limited monthly growth, but the annual increase reached 17.6%, likely supported by lower house prices that eased affordability constraints for homebuyers. Overall, property sales remained below their levels from a year ago, marking the fifth consecutive month of annual declines.