reuters/test/14891

ECONOMIC SPOTLIGHT - KUWAITI ECONOMY
  Kuwait's oil-reliant and debt-ridden
  economy has started to pull out of a nosedive but oil prices
  will determine the pace of recovery, bankers and economists
  say.
      Crucial will be the ability of the 13-member OPEC to hold
  oil prices around a new benchmark of 18 dlrs a barrel in the
  northern hemisphere summer when demand usually slackens.
      Bankers estimate the economy, measured in terms of gross
  domestic product (gdp), shrank 19 pct in real terms last year
  after contracting 8.1 pct the year before.
      This was after taking into account inflation in consumer
  prices of 1.5 pct in 1985, slowing to 1.0 pct in 1986.
      Factors depressing economic activity include the
  6-1/2-year-old Iran-Iraq war on Kuwait's doorstep, which
  threatens the emirate's vital oil export lifeline through the
  Gulf and has sapped business confidence.
      But sentiment received a much-needed boost in September
  when, after a series of piecemeal steps to combat a debt crisis
  caused by the 1982 crash of local stock market, a comprehensive
  new debt settlement program was introduced.
      The share crash, result of a speculative spree in forward
  trading, left 95 billion dlrs of post-dated cheques in default.
      The cheques were also used as collateral for consumer
  spending, thus generating an informal credit system.
      Much of the debt has been watered down but big sums are
  still owed by individuals and companies.
      There was some 4.4 billion dinars (about 15.7 billion dlrs)
  in outstanding bank credit at the end of 1986, of which
  one-quarter to one-third was estimated by bankers to rank as
  bad or doubtful debt. But the government has repeatedly said it
  will not allow any banks to go under.
      The new debt settlement scheme entails a rescheduling of
  problem credit over 10 to 15 years, depending on whether
  debtors have regular cash flows or not.
      Banks' shareholders and depositors will have their rights
  guaranteed by the government -- an edict of vital significance
  in a country of only 1.7 mln people where the financial sector
  is the biggest after oil.
      Kuwait is better placed than any other OPEC country to ride
  out the oil glut, bankers and economists say.
      Kuwait has an OPEC quota of 948,000 barrels per day (bpd)
  compared with production capacity of 4.0 mln bpd mentioned last
  year by Oil Minister Sheikh Ali al-Khalifa al-Sabah.
      But strategic diversification into downstream operations in
  Europe several years ago and a hefty refining investment at
  home gives it guaranteed markets abroad and enables it to sell
  over one-half of its output as high-grade refined oil products.
      Oil industry sources say Kuwait is able to get an average
  2.00 dlrs a barrel more by selling oil in the form of processed
  product such as gas oil, kerosene and naphtha, rather than as
  crude.
      Bankers say the rebound in oil prices is the major reason
  for cautious optimism. Other reasons are low domestic
  inflation, a bottoming out of the fall in imports in recent
  years and signs government spending on productive sectors will
  remain steady.
      External accounts are in good shape, with an estimated 1.8
  billion dinar current account surplus in 1986, 16 pct below
  that for 1985, but still an achievement in the recession-hit
  Gulf.
      Kuwait's petrodollar reserves in mid-1986 were put
  officially at over 80 billion dlrs, earning investment income
  of the equivalent of about 3.65 billion dlrs a year.
      But for the first time since the end of the oil boom, these
  reserves may not be enough to prevent a "real" budget deficit for
  the 1986/87 fiscal year ending June 30, bankers say.
      In a budget portrayed by bankers as mildly contractionary,
  revenues for 1986/87 were cut 38.6 pct and spending 11 pct,
  doubling the nominal deficit to 1.33 billion dinars.
      This left out income from state reserves, usually excluded
  in official budget accounting, which are forecast by bankers at
  up to 1.0 billion dinars in 1986/87, resulting in some
  shortfall.
      Bankers say it is too early to venture a forecast for
  economic growth this year or next.
      "It depends on oil prices," one said. "This summer is
  important."
      Cabinet Affairs Minister Rashid al-Rashid said last Sunday
  the cabinet has ratified recommendations to rationalise state
  spending in favour of productive sectors and reactivate the
  economy.
      He gave no details but bankers say these are expected to be
  spelled out in the 1987/88 budget, possibly in June.