KUWAIT - The Economic Base.

The Kuwaiti economy is in recession, as in the case of the other five GCC countries, due to a big fall in oil prices last year. Kuwait's oil income in calendar 1998 was $7.6 bn, compared to $12.5 bn in 1997. In the fourth quarter of 1998, the oil income was $1.8 bn, $102m higher than the third quarter's but 47% down on the fourth quarter of 1997. The state budget for fiscal 1999/00, starting from next July 1, is based on an average crude oil price of $10/barrel. For the previous year's budget, the oil price assumption was cut in mid-1998 from $12 to $10/b.

The market price of Kuwaiti crude oil in 1996 had averaged $16.80/b compared to a budgeted $13/b price, giving the country an extra $3.80/b. Kuwait had then started to rebuild its overseas reserves held as part of the State General Reserve Fund, managed by the Kuwait Investment Authority (KIA), and the Reserve Fund for Future Generations (RFFG). Overseas funds used to be $100 bn before the Iraqi invasion, but dropped to $35 bn in 1991 as it was used to pay the costs of Operations Desert Shield and Desert Storm. Now the RFFG has assets worth about $45 bn. The Kuwaiti private sector is estimated to have $40-60 bn in assets abroad.

The state's overseas holdings are estimated at $55 bn. They include equity in Mercedes Benz and Hoechst of Germany. KPC's major acquisitions overseas include the $2.5 bn purchase of Santa Fe of the US in 1981 and a stake in BP. Re-organising its overseas portfolio, on May 15, 1997, KIA sold a 3% stake in BP for $2 bn, leaving it with 6.3%. On June 9, 1997, KPC sold a 31% share in Santa Fe for more than $990m. In December 1996, it sold Santa Fe Exploration UK Ltd. to Saga Petroleum A/S of Norway for $1.23 bn. Other Santa Fe holdings are expected to be sold. In December 1996 the government paid the last installment on its sovereign debt of $5.5 bn.

Strong performance in the stock exchange (KSE), where the index rose by 40% in 1996 with a weekly turnover of $1 bn, was reversed in 1998. In the first quarter of 1998, the KSE index lost 13% and went on to end the year 40% down. Turnover fell sharply, with shares worth KD3.34 bn ($11 bn) changing hands against KD10.5 bn ($34.74 bn) in 1997, due to a slowdown in government spending.

The situation remains difficult despite a $6/b increase in oil prices in the past two months. But if oil prices continue to rise, the economy would improve later this year. In early 1999, US credit rating agency Moody's gave Kuwait a domestic currency debt rating of Baa1, the fourth highest investment grade. It said: "Over the long term, Kuwait's finances are underpinned by vast oil reserves, some of which may soon be expanded by foreign oil companies". It said, the state can draw on its overseas assets to cover domestic debts and budget deficits. But the state's overseas investment income would depreciate in 1999. The IMF says the economy would shrink 1.9% in 1999 and 0.7% in 2000, compared to a 2.2% growth in 1998.