Markaz: Coronavirus and oil price crash - Kuwait Recovery Strategyneeds a Swift Disaster


Kuwait Financial Centre “Markaz” said that Kuwait has been simultaneously hit by a Coronavirus scare and oil price collapse. Therefore, Kuwait needs a swift Disaster Recovery Strategy (DRS) to contain the fear and impact

How Coronavirus is spreading beyond China..

Coronavirus (Covid19) was initially detected in Wuhan, China in December 2019 in what appeared to be a containable disease. However, as days progressed the speed with which the virus spread within China alarmed the world but there was no panic as people still believed it to be a China centric issue. However, global supply chain was disrupted and global growth forecast were revised downwards albeit marginally. However, when the disease spread to Iran, Italy, Japan and South Korea, panic set in impacting global travel, business functions, healthcare systems, etc. Kuwait reported cases of Covid19. The response was swift in terms of cancelling flights to and from certain destinations, closure of schools, and preparing hospitals for contingency.

Crisis Management & Disaster Recovery Strategy…

The Novel Coronavirus (also called Covid19) has created a panic like situation in almost all parts of the world including Kuwait. It has triggered a crisis that is impacting many points including schools, hospitals, offices, airports, and other vital places. The management of this crisis should be through a Disaster Recovery Strategy (DRS) that can enable Kuwait tackle the problems in a more organized way. A properly conceived DRS can enable resumption of services following a crisis. An emergency communication plan is integral to DRS as good and swift communication can calm nerves easily and enable people to return to normal routine at the earliest. While the suggested DRS is focused on Coronavirus issue, the concept of DRS should be a permanent one so that Kuwait can face future crisis with minimal dislocation.

In addition, given the Coronavirus scare and its impact, Kuwait’s healthcare and medical system is coming under intense pressure. The main effects on the healthcare will be in the form of consumables (e.g. masks, PCR test kits, sanitizes, etc.), capacity in terms of ICU rooms, human resources (medical, paramedical size and morale given the social media assaults against certain nationalities) and governance (good management, conflict of interest and utilization time of facilities of low priority cases such as plastic surgeries).

How the oil price war drama unfolded..

Crude oil price fell nearly 30% to $36/bbl and market experts feel there is more to come. What triggered this massive price fall is the decision by Saudi Arabia to increase its production and supply and reduce the price in order to gain market share. The move was primarily triggered after Russia refused to make more production cuts as a response to Coronavirus threat to global demand. The sudden move of Saudi Arabia came at an unexpected time when global demand has weakened considerably sparking even recessionary fears. Back in 2014 when Saudi Arabia pursued this strategy of increasing the production to drive out the Shale producers, it did not succeed.

In this price war, obviously there are more losers than winners. While broadly oil-consuming nations like China and India will benefit, low oil price on the back of weak demand will severely hurt oil-exporting countries including Kuwait. According to analysts, the new low oil price will severely hurt U.S. Shale producers as well as they are now more indebted than before with weaker balance sheets. U.S. energy companies account for 11% share in the overall junk bond market issuances.

How this affects Kuwait…​

Coming to Kuwait specifically, the first impact will be widening budget deficit. Kuwait projected a deficit budget (post-FGF transfer) of KD 9.2billion (21.4% of 2020e GDP) at an assumed oil price of $55/bbl. That projection can go wrong and a widening fiscal deficit will result in more reserves drained out of General Reserve of Government of Kuwait as it currently has a problem borrowing from international markets due to non-passage of the Debt law in the parliament. The low oil price will also affect stock market performance. While the premier market (total return) index of Kuwait Stock exchange posted gains of 12.3% and 37.3% in 2018 and 2019 respectively, so far during the year it has lost 24.6%, of which 19.3% loss was experienced on two days (March 08 and 09). Kuwait is also trying to attract foreign direct investment in order to diversify its economy and this will be impacted now.

While these are the impact points at the broader economy level, we need to look at how this will impact other sectors including the private sector and SME’s. In its quest to diversify the economy and create jobs, the Government looks upon private sector to be in the forefront to create jobs. However, lower oil price will mean lesser government spending in general and lower project spending in particular and this will affect the private sector non-oil growth. Also small and medium enterprises will be the immediate casualty as their ability to withstand crisis is limited by their size and performance. It should "Press Release" be noted that SME’s contribute 3% to GDP and accounts for 23% of jobs (World Bank, 2016). Encouraging and nurturing an entrepreneurship culture at all times is essential for diversifying the economy away from oil.

Policy options should be different and swift.​

In situations where budget deficit will widen beyond control, normal policy response is to curtail expenditure or increase non-oil revenues (like taxes) or both. Citizens of Kuwait enjoy a social contract that guarantees jobs, healthcare and retirement. Efforts to curtail expenditure or impose taxes will dent this social contract. Bulk of the expenditure in Kuwait is on account of salaries to government employees and subsidies. There is vast scope to improve the efficiency of government services and reduce corruption as a means of controlling expenditure. Imposing burden on citizens without tackling these vexing long-term issues can create social disillusionment.

There are many policy options available at this point in time to tackle oil price collapse. First and foremost, in order to comfort private sector and SME’s the government can initiate countercyclical investment program to support liquidity. This investment program at the national level (in what can be called as National Investment Program) should aim to use government reserves to support private sector and SME’s more during crisis periods (like this) and probably a little less when times turn good. However, having a robust National Investment Program is at the heart of tackling the sustainability issue for the country. While investments could be counter cyclical, reforms should not be. Economic reforms especially in key sectors like education and healthcare should be pursued, measured and reported at all times to make steady progress in global competitive rankings. The reforms would be aimed at making business environment friendly and easy to operate both for domestic and foreign investors.

Oil price collapse is always a serious warning sign for oil dependent economies like Kuwait. The world is moving towards clean energy, significant improvements in energy efficiency and cost gains have been reported on alternative energy sources like solar. Energy market may thus move to a structural change where global oil dependency can reduce rapidly. In light of these, it is wrong to assume that Kuwait has adequate time and resources on hand to act. What makes the current time very challenging is the double whammy of a combination of a disease spread threat alongside oil price collapse. It is fair to assume that both are temporary challenges with long-term implications for Kuwait Healthcare and economic management.