Kuwait: the Dinar Has Strengthened Largely As a Result of a Stronger Dollar

Economic Update 26 November 2014

Exchange rate Kuwait: the dinar has strengthened largely as a result of a stronger dollar

The Kuwaiti dinar (KD) has strengthened somewhat over the last Chart 1: Exchange rate few months, in large part due to the stronger dollar. The dinar, which (LHS: USD/KWD; RHS: index) 3.70 110 is pegged to a basket of major currencies, has declined against the USD USD/KWD Dinar index (RHS) since June; however, it has moved up against all other major currencies, 3.65 108 and as a result strengthened overall. 3.60 106

The currency’s nominal effective exchange rate (NEER) has increased 3.55 104 by around 2.6% since June. The NEER, estimated by JP Morgan’s KD 3.50 102 index, is an index of major currencies weighted by their importance in 3.45 100 Kuwaiti trade. Around 20% of Kuwait’s imports come from the Eurozone, 10% from the US and another 8% from Japan. A large part of the rest 3.40 98 comes from countries whose currencies are closely tied to the US dollar. 3.35 96

3.30 94 The KD has appreciated against most major currencies by around 5- Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 11% since June, though it has slipped against the US dollar. The dinar Source: JP Morgan, Thomson Reuters Datastream has declined against the USD by 3.4% since June, falling from 3.55 USD/KWD to 3.43. At the same time, it has gained against the euro by Chart 2: Exchange rate indexes 6.2%, the yen by 11% and the pound by 5.5%. 130 130 EUR/KWD USD/KWD Recent movements in exchange rates are largely a reflection of 125 125 JPY/KWD changes in monetary policy in major economies. The dollar and GBP/KWD 120 120 foreign exchange markets have finally made large moves driven primarily by central banks’ diverging policies. The US Federal Reserve has finally 115 115 ended its QE3 program (quantitative easing), thus paving the way to 110 110 higher official interest rates for the US dollar sometime in second half of 105 105 2015. The Fed’s updated policy stance reflects a now much healthier US 100 100 economy, poised to grow 3% in the second half of this year. 95 95 The US growth contrasts with the two other large economies that are 90 90 struggling: the Eurozone and Japan. Very weak growth in the Eurozone Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 and a (technical) recession in Japan by 3Q14, alongside deflationary Source: Thomson Reuters Datastream pressures are forcing the central banks to renew their stimulative efforts. As the Fed tends toward the end of monetary easing, others are becoming more aggressive. Result: both currencies are down against the dollar, but the Japanese Yen more dramatically so than the euro. A stronger KD should help keep inflation low. Inflation is running at around 3.2% in Kuwait and is expected to remain relatively modest in 2015. The dinar’s strength should help keep a lid on price growth. A 1% increase, if sustained over time, in the KD’s value (index basis) could result in a 0.25-0.5% percentage point decline in the inflation rate. The impact of a stronger dinar on the trade surplus is expected to be positive. Oil exports will rise as the dinar declines against the dollar. Meanwhile, imports will decline as a stronger KD results in a smaller import bill; while demand for imports is likely to rise as goods become cheaper and thus more attractive, this increase tends to be smaller than the drop in prices. The stronger dollar will also have a small positive impact on government revenues. We estimate that a 1% decline in the USD/KWD rate adds around KD 250 million to state revenues, or 0.5% of GDP.

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