“It is very difficult to do that, because the revenues are so good, it’s easy money. Kuwait and Saudi are trying to move away (from oil dependence) but they would still be dependent on oil revenue even 20 years from now”, said Tariq Al Rifai, CEO of Quorum Centre for Strategic Studies in London, during the Q & A session following a lecture highlighting the broad future contours of global and Kuwait economy.
He was replying to a question posed by Arab Times about the prospects of Kuwait and other GCC states weaning themselves off the oil revenues in the near future. On a follow–up question by Arab Times, on the impact of OPEC teaming up with Russia to take on the might of US shale, Al Rifai commented that it will have little long term effect on the oil prices.
US has surpassed Saudi to emerge as the biggest oil producer in the world, but that is temporary, he added. The lecture, titled ‘The Global Financial and Economic Outlook for 2019’ was organized by the Union of Investment Companies (UIC) at the Chamber of Commerce in Kuwait.
Al Rifai discussed at length about the current economic cycle which he believes is nearing an end and the global economy is heading for another period of recession after the 2009 financial crisis.
“A recession is a normal occurrence and does not necessarily mean bad news for your investments”, he said. Connecting the lower economic growth to oil market, Al Rifai said, as the world lurches towards its first recession since 2009, we can expect lower oil prices in the future. This implies that Kuwait government would be under pressure vis-à-vis the implementation of its Future Vision 2035 plan which is aimed at weaning the economy away from its dependence on oil revenues.
Kuwait must brace itself for a world less dependent on oil because the next 10 years will be nothing like the past 10 years, he added. Kuwait’s GDP growth is highly volatile and this is due to its heavy dependence on oil prices, said Al Rifai. The state revenues have dropped by 60 pct over last the three years while spending was down 8 pct in the same period as government went into deficit to fund the spending.
Kuwait was technically in a recession in 2017 but it was not a severe one as the government continued with its spending plans. “It was a positive move by the government”. Shedding more light on Kuwait, Al Rifai stated that the economy is dependent on two things – state spending and consumer spending. “The consumer spending has been on steady rise since the last ten years and would be attractive for anyone in the world “.
Consumers in Kuwait spend more and more every year regardless of what is happening around them, he further added. Kuwait’s GDP growth has averaged 3.6 pct during 1994 – 2017 period. However, in the last two years it has not been able to achieve that growth as it faces structural issues akin to the European Union and is not related to fl uctuations in oil prices, Al Rifai affirmed. The per capita GDP, which is an indicator of quality of life, however has been declining since last ten years.
Kuwait also needs to tap further into bond market like UAE as it helps to cushion the deficit, he reiterated. It should also move further in the direction of liberalization and improve the ease of doing business. All major economies in Europe are on decline including Germany’s powerhouse economy and France, Al-Rifai noted.
Italy is already in recession and is weighing down heavily on the bloc’s economy. EU has never recovered from the last recession and its current GDP is lower than what it was ten years ago. He cited heavy government debt and other structural issues as the main constrains for EU growth.
Germany however has shown exceptionally high fiscal discipline and has managed to keep its debt levels low. It must be noted that global debt has risen at an alarming rate and has added $58 trillion in debts in last ten years.
Turkey too is heading for recession and it could be a severe one, he stated as it continues to face high debt levels and high inflation rate. The country’s currency saw the steepest fall of 40 pct during last year. Bank of England has downgraded its growth forecast of UK citing Brexit, trade war and other global economic problems but the country is doing better than the rest of EU. With regard to the Brexit, Al Rifai commented that UK’s exit from EU could be positive for UK if is well managed.
The UK government has mismanaged the exit process. EU doesn’t want any country to leave it. “The EU requires Britain more than Britain needs EU”. Extending a word of caution to Kuwaiti investors in UK, he said that the value of their investment will depend impact of Brexit on sterling. US, however is an exception in the current gloomy global scenario, Al Rifai stated, and has emerged as the best performer among the large economies with a 3.4 pct GDP (Q-o-Q) growth. IMF expects 2019 to witness a lower global economic growth due to trade war, Brexit and other risks.
Elaborating on the forecasts by major world organizations and central banks, Al Rifai pointed out that their predictions are not consistent and it doesn’t always go in their favor. Central banks and international agencies such as the IMF and World Bank have never forecast a recession, he noted.
The US-China trade war is beginning to impact global trade and economic growth, especially in China, he said. China’s economic decline is set to get only worse as the trade war enters its second year.
The world’s second largest economy is headed for a major financial and economic disaster and this will affect us all, Al Rifai cautioned. The country is facing a mammoth crisis as the corporate debts zoomed by nearly 400 pct in last ten years to $15 trillion.
With regard to fluctuations in oil prices, Al Rifai pointed out that contradictory to the media reports, the crude prices are not controlled by OPEC but are determined by the market and the traders and not by actual supply and demand. Since 2005-06, the oil prices has behaved erratically.
The sanctions on Iran and the production cut by Saudi had negligible effect on the oil prices. In the last 15 years, the demand for oil has come primarily from one country – China and its appetite has stagnated.