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Kuwait BEP may range around $49 in 2015, 2016: IMF – Marmore MENA Intelligence Report

Marmore-MENAKUWAIT: Marmore MENA Intelligence, a research subsidiary of Kuwait Financial Centre "Markaz", recently published its report on the fiscal breakeven oil price (BEP). It is the oil price that balances an oil exporting country's budget. The report delves into the fact that different institutions and assessors provide varying estimates of the BEP, leading to confusion in the minds of many who track the metric. The metric, at its core, is simple in terms of calculation. Why, then, the plethora of estimates? The report uncovers some insights through estimation of the BEP on its own for three GCC countries, including Kuwait, providing clues as to how inclusion or exclusion of certain items, like investment income, can alter the BEP figures.
There are some straightforward reasons as to why the estimations of break-even prices can vary. For instance, historical numbers that are used to calculate break-even prices may differ from year to year. Or, estimates can differ with respect to forecasts of oil production volumes, export volumes and the global oil prices. Also, differences in estimates with respect to future government spending or differences with respect to inclusion or exclusion of some revenue items can create variances.
BEP can be calculated using techniques like taking a government's expenditure plans for a given year plus an estimated level of production/exports, and then calculating the price level required to match the expenditure while taking into account of other revenues (like tax) from non-oil sources. Or, there are more sophisticated and proprietary methods available like that of the International Monetary Fund or the Institute of International Finance (IIF).

Investment income
The International Monetary Fund provides BEP estimates for Kuwait until 2016. According to IMF, the BEP for Kuwait in 2015 and 2016 is expected to range around $49 (with investment income). Our estimates show that for 2015 and 2016, the values be $51.2 and $50.2, respectively. For 2020, we expect the value to go up to $54.1. However, estimates will differ with respect to how investment income is treated.
Some of the key findings from the study are that for Kuwait, the addition or removal of the nation's sovereign wealth fund's income plays a significant role in the estimates of BEP. However, in the case of the KSA, the investment income does not play a major role..

Without investment income, UAE's BEP can increase from anywhere between 25 percent to about 50 percent, which signifies the budgetary importance of investment income to the UAE. In other words, if investment income is considered as part of the non-oil revenues, then the BEP comes down to a large degree for both Kuwait and the UAE. Broadening the general discussion to the GCC level, it is notable that oil exporting countries have to keep a careful watch over their breakeven prices. For instance, Oman and Bahrain, which have the highest breakeven prices in the GCC region, were characterized as vulnerable to oil shocks by analysts. GCC governments are better placed, to weather a sustained period of lower oil prices, than most other exporters due to their robust reserve levels;

The metric of non-oil fiscal balance can be used to gauge the level of diversification. Analysis of the metric of non-oil fiscal balance reveals that growth of non-oil sectors is heavily dependent on government spending for Kuwait and Oman; while the vice-versa is true in the case of UAE and Qatar.
The fiscal oil breakeven is an important metric. But, it should not be taken at face value. The metric can fluctuate greatly on the basis of assumptions.
Established in 2010, Marmore is a research subsidiary of Markaz, an investment bank and asset management firm that celebrated 40 years of business in 2014. Marmore caters to the growing research and information needs of organizations in the MENA region. The company publishes reports and conducts research on demand.

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This article was published on 22/04/2015