Past decade reveals dramatic rise in size of Kuwait''s current account surplus

Past decade reveals dramatic rise in size of Kuwait''s current account surplus

Economics 7/9/2011 6:38:00 PM

KUWAIT, July 9 (KUNA) -- Kuwait's current account surplus reached KD 10.6 billion, or 29 pct of GDP, up from KD 2.6 billion in 2001, the local National Bank of Kuwait said in a report on Saturday.

In its weekly report issued on Saturday, it said the current account surplus is the sum of the balance of trade in goods and services, investment income and transfers received from abroad.

The rise in the surplus over time has been closely linked to the steady climb in global oil prices; almost all of the increase in the surplus has come from oil exports, reflecting the rise in the price of Kuwaiti export crude from USD 21 per barrel (pb) in 2001 to USD 76 pb in 2010.

By contrast, the balance on the other parts of the current account - in aggregate at least - has weakened.

The current account is only one half of the story of Kuwait's international transactions, however. The capital and financial account reflects the net change in the ownership of foreign assets, the source of potential income in the future. It includes changes in net foreign holdings of financial instruments, loans, shareholdings (including FDI) and currency. If, in accounting terms, the current account is the income statement, the capital and financial account can be thought of more as changes in the balance sheet, reflecting changes in a country's net stock of international assets.

Although these things are often discussed separately with their own distinct driving forces, they are effectively flip sides of the same coin. In a given time period, a change in one must generate an exact and opposite change in the other, once errors and omissions and changes in the central bank's foreign assets are accounted for.

Why? The trade surplus generates foreign currency holdings. These holdings are a claim on the outside world whether they end up buying an asset abroad, or as cash reserves in the Kuwaiti banking system.

Either way, it increases the country's stock of international assets, recorded as a debit in the capital and financial account. Whichever combination of the above actually occurs, it will exactly offset the value of the original transaction (again, once data errors and changes in central bank reserves are accounted for); the trade surplus is turned into a foreign asset held by Kuwait.

The balances on the other two components of the financial account have been - on the whole - larger and more volatile. The largest net outflows have been seen in portfolio investments, which rose from KD 3 bn in 2001 to a peak of KD 10 bn in 2007, though have since fallen back.

These are foreign investments in financial instruments such as equities and bonds, but exclude the longer-term share stakes captured in FDI flows. The surge in overseas portfolio investments between 2006 and 2008 was driven by investment by the Kuwaiti government as it sought to recycle surplus oil revenues not used to finance its budget spending. Finally, the 'other investment' balance of the financial account - mostly net overseas loans and investments in shorter-term deposit accounts - has shown the most volatility in recent years, swinging from a KD 3 billion surplus (i.e. net inflows to Kuwait) in 2007 to a KD 7 billion deficit in 2010.

The unusual surplus in 2007 was partly a reflection of large capital inflows as speculators bet on a revaluation of the Kuwaiti dinar. The sharp rise in the deficit in 2010 was linked to the repayment of private foreign loans and an increase in Kuwaiti private sector net outflows into short-term international deposits.

The cumulative deficit stood at KD 73 billion (USD 250 billion), signifying an equivalent amount of Kuwaiti net investment in overseas assets. All of this came from the financial account, of which more than half was from portfolio investments in overseas shares and bonds.

What is equally apparent is the huge role of the government. Some KD 62 billion of capital and financial account outflows, or 85 pct of the total, has come from the government (which in this case excludes the central bank).

This is of course unsurprising given that the government owns almost the entire oil sector and controls the country's investment funds (such as the Kuwait Investment Authority and the Public Institute for Social Security).

Aside from providing the government with a way of productively deploying revenues that cannot be used at home, these investments provide a stream of future revenues that help reduce the state's dependence upon oil. (end) fnk.sd KUNA 091838 Jul 11NNNN

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