'Al-Watani': Kuwaiti Economy Absorbed Initial Shock of Conflict

- Oil production rises to three-quarters of its pre-conflict level

- Fiscal space is comfortable and debt burden remains low by global standards

- Kuwaiti crude widened its premium over Brent, surpassing $126

- $7.9 billion in revenues from oil pipeline lease deal

- Government raised 4.3 billion dinars from debt markets in 2026/2027

- Consumer inflation slowed to a three-month low of 2.2 percent

A report by National Bank of Kuwait highlighted clear signs of resilience in the Kuwaiti economy, 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 has improved despite headwinds stemming from trade disruptions, project delays, and general uncertainty linked to the conflict, supported by government measures, stable household incomes, and easing inflationary pressures.

The report noted that 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 report stated that improving economic data reinforced earlier readings that the non-oil economy would avoid a sharp slowdown. Although growth forecasts were revised downward from June to reflect modified 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 recorded that Kuwait Export Crude (KEC) rose at a faster pace, surpassing $126 per barrel, thereby widening its premium over Brent. This reflects a shortage of highly sought-after medium-sour crude by Asian refineries. However, regional oil production recovery continued through August.

The OPEC report on the oil market noted that Kuwait managed to regain the largest share of production since its post-conflict low in March, adding 1.4 million barrels per day to reach 2 million. Production now stands at slightly over three-quarters of pre-conflict levels, a notable achievement that will enable Kuwait to quickly reach its higher OPEC+ production ceiling of 2.68 million barrels per day once the Strait is fully reopened.

The report also highlighted that the Kuwait Petroleum Corporation signed a landmark $16 billion sale-and-leaseback deal for its crude oil export pipeline network, generating upfront revenues of $7.9 billion. A new joint venture will be established, with Kuwait Oil Company retaining a 51 percent stake, while the Corporation retains full ownership and operational control over the thirteen pipelines.

The report addressed the government’s new legislation to borrow from the sovereign wealth fund, which holds assets exceeding $1 trillion, to enhance liquidity margins, but within strict controls.

Under the law, the borrowing cap in any fiscal year is set at 100 percent of the fund’s average investment returns over the previous five years. Meanwhile, the total outstanding loan balance cannot exceed 10 percent of the net asset value of the reserve, implying a loan balance cap exceeding 30 billion dinars.

The government continued to rely on 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. This brings total debt market fundraising to KD 4.3 billion so far in the current fiscal year (2026–2027).

The report noted that the non-oil private sector Purchasing Managers’ Index (PMI) continued to expand in August, rising to 53.6 points from 50.8 points in July. The recovery was supported by strong demand growth, with both production and new orders surging to their highest levels since February, driven by competitive pricing and effective marketing efforts.

It highlighted that activity in the real estate sector continued to improve in July, with property sales reaching KD 395 million, the highest level since February 2026 (down 9.6 percent year-on-year).

Sales rose on a month-on-month basis across all sectors, led by the investment sector (still down 28 percent year-on-year), followed by the commercial sector (down 14.1 percent year-on-year).

The report pointed out that consumer price inflation slowed to a three-month low of 2.2 percent year-on-year in June, compared to around 2.5 percent in May, reflecting easing price pressures across most major categories.

Food inflation remained elevated at 5.6 percent year-on-year but continued to decline, while housing inflation slowed to 0.2 percent year-on-year, its lowest level since August 2021, amid easing rental pressures. Core inflation edged down slightly to 2.1 percent year-on-year, despite an acceleration in transport inflation due to higher airfare prices linked to regional tensions. Overall, the data indicate a moderation in inflationary pressures as supply disruptions related to the conflict continue to recede.

Assuming shipping routes return to normal by mid-2027, the report expects oil production to exceed pre-conflict levels by the end of next year, supported by a potentially higher production quota from OPEC.

At the same time, global oil prices are expected to remain high but within a relatively stable range under the baseline scenario, avoiding sharp spikes associated with more intense regional escalation. We maintain our April oil price forecasts at an average of $90 per barrel for Brent crude in 2026 and $80 in 2027, with the risk balance skewed to the upside following recent disruptions in the Bab el-Mandeb Strait, which have exacerbated supply shortages and declining global inventories. Low global inventory levels suggest a period of stock rebuilding once flows normalize, which should support crude prices even as Gulf Cooperation Council (GCC) countries’ supplies return to the market.

The report also expects that higher refined product output, accelerated project implementation, and increased investment will support non-oil growth recovery to 5.1 percent in 2027, compared to around -2 percent in 2026.

Consumer spending and household credit growth are also likely to accelerate next year, though they will remain at relatively modest levels due to constraining factors, including slow employment and wage growth. A key factor supporting the medium-term credit outlook is the long-awaited approval of the mortgage law, which will pave the way for additional subsidized housing finance repayable over 25 years.

This is expected to support residential construction activity and the growth of related sectors, although the limited supply of housing and government land remains the main constraint, and new borrowing may not materialize for some time.

The report noted that the sharp decline in oil revenues, coupled with spending on conflict-related costs, including subsidies and capital expenditures for reconstruction, will lead to a fiscal deficit of approximately 20 percent of GDP (9.6 billion dinars) in the 2026-2027 fiscal year, which is wider than the 15 percent of GDP deficit recorded in the 2025-2026 fiscal year.

However, 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 reduction in conflict-related reconstruction spending.

The report also anticipated that the government would refocus on its public financial management agenda after a period of high spending pressures. This includes continuing efforts to boost non-oil revenues, particularly through the ongoing review 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.

The report concluded that 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, effectively raising the aggregate government debt ceiling to more than 60 billion dinars, compared to approximately 11 billion dinars in current issuances. Increased liquidity will enable further acceleration of economic diversification projects, driving progress toward long-term development goals and stimulating non-oil sector growth.