Like most GCC economies, Kuwait is well known for its buy-side investment activity – a result of its historic ability to transform oil revenues into global investments aimed at securing future economic sustainability. However, as the nation enters a third year of lower oil prices, Kuwait’s attractiveness as a destination for inward investment has come under increasing scrutiny. The government is eyeing global capital flows to support its bold development strategy, and recent years have seen a number of innovations aimed at attracting foreign investment to the country. Challenges remain, however, and Kuwait still has progress to make on international ease of doing business indicators. In the meantime, falling oil revenues have highlighted the nation’s dependence on a single export category, and therefore diversifying its export base and removing barriers to trade have also emerged as key priorities.
Like many hydrocarbons-based economies in the Gulf region, Kuwait’s reputation as a global investor is largely derived from the activities of its sovereign wealth fund (SWF), the Kuwait Investment Authority (KIA). Established in 1953 as a Bank of England account which received the state’s oil revenues, it is the oldest SWF in the world, and today operates as an autonomous governmental body that is charged with managing the assets of the country. The KIA is therefore the primary instrument by which Kuwait uses the surpluses generated by its oil and gas industry to ensure the economic wellbeing of future generations.
With total assets of $524bn as of June 2017, the KIA is the fourth-largest SWF in the world, as well as the second largest in the GCC region, according to the Sovereign Wealth Fund Institute. An investment institution of this size brings a number of beneficial effects to the local economy: the KIA promotes institutionalisation of the market by establishing funds and companies to promote and finance local business, and participates in local investments which promise economic returns; it helps to develop local financial firms by allowing them to manage some of its investments both domestically and abroad; and in the area of government finances the KIA plays an important role by providing liquidity to the Treasury when necessary.
With regard to its global investment activity, the KIA largely uses external fund managers to invest funds out of Kuwait, while its Kuwait Investment Office trades directly on its behalf in the UK. The fund’s asset allocations are regularly reviewed, but in broad terms it is a long-term investor that places capital in a wide range of assets, from traditional assets such as equities and bonds to alternative investments such as private equity, real estate and infrastructure.
In a small number of areas it has established specialised companies to address specific markets, such as the Atlanta-based Fosterlane/Breadstreet for real estate investments in the US, and the London-based Wren House Infrastructure, which concentrates on global brownfield investments.
Like all SWFs, the KIA faces the challenge of maintaining returns in an era of market volatility and slow global growth. Mirroring the actions of other funds in the region, the KIA has sought to reduce management fees by shifting investment activity away from external fund managers and handing in-house teams a greater share of investment responsibilities. In January 2017 it announced plans to increase the allocation of funds that are managed in-house from the established level of between 1% and 2% to around 8%. In monetary terms, this would mean that the KIA’s internal managers would be making investment decisions concerning an estimated $35bn worth of assets, allowing it much more flexibility in directing funds to promising areas and establishing its own risk management strategies. The effect of increased internal management on overall revenue will be one of the most closely tracked issues over the medium term.
For the government’s economic planners, however, inward investment flows are a more pressing matter than the nation’s large outward portfolio investment. The downturn in oil prices that began in late 2014 has highlighted the limitations of a growth strategy based on the simple redistribution of oil revenues. One answer to this structural vulnerability is economic diversification – a key government objective in Kuwait, as it is in all GCC economies.
Another is the greater utilisation of private capital in the development of the economy, which has placed increased importance on accessing global capital flows. Kuwait’s efforts to attract more foreign direct investment (FDI) to the country, however, predate the recent fall in oil prices. The nation’s first FDI law was promulgated in 2001, and allowed foreigners to own 100% of local businesses in a small number of areas that are viewed by the government as being fundamental to economic diversification and growth. These included downstream chemical manufacturing, transport, tourism and health care.
Looking To FDI
Yet more economic liberalisation came a decade later with the passing of a new FDI law in 2013. Implemented in 2015, the new FDI framework considerably improves Kuwait’s investment environment and offers foreign investors several major incentives. Chief among these are the ability to own or increase ownership in Kuwaiti companies to 100% in all economic areas, other than those on a negative list (a reversal of the previous positive list system), the ability to operate through a 100% foreign-owned branch, and a range of income tax and Customs duty exemptions. The new law has also established the Kuwait Direct Investment Promotion Authority (KDIPA), a one-stop shop where investors can obtain necessary licences and claim incentives, and which replaces the Kuwait Foreign Investment Bureau. The passing of the law coincided with a new commercial companies law that eased some of the constraints on establishing and operating a business in Kuwait, which also represents an key step in the direction of economic liberalisation.
Another recent addition to the FDI-related legislative framework is the public-private partnership (PPP) Law No. 116 of 2014, which replaced the PPP law of 2008. The new law codifies a number of models, policies and procedures related to project financing that had previously been difficult to carry out in the country. Areas that have benefitted from a legislative upgrade include the incorporation and structuring of shareholder agreements, selling and warehousing shares reserved for domestic investors during the early stages of a project, and financial security for investors in development projects. The new PPP law officially came into effect upon publication of the policy’s executive by-laws in late March 2015. To date, the Al Zour North independent water and power project (IWPP), initially awarded in 2013, is the only one to have been successfully developed through the PPP model. However, as the government continues with the implementation of a bold infrastructure development programme, such an approach is likely to feature more prominently.
The Kuwait Authority for Partnership Projects (KAPP), which replaced the previous Partnerships Technical Bureau, will be instrumental to the growth of PPPs in the years ahead. The body is charged with supporting government authorities throughout the PPP process, researching to identify potential new PPP opportunities and developing PPP contract guidelines, among other tasks. The authority supports a newly formed Higher Committee – consisting of a group of ministers appointed by the government – which is empowered to make decisions about launching and approving PPP projects in Kuwait, pending approval by the minister of finance.
Elsewhere, the government has shown a willingness to open up a number of specific sectors to increased levels of foreign investment: in March 2014 it announced that foreign banks could open multiple branches in the country, removing the one-branch limit; in April 2014 the passage of long-anticipated telecommunications legislation indicated a willingness to liberalise the sector and increase competition over the coming years; while in the same year the government signalled its intention to privatise the Kuwait Stock Exchange (KSE) and the national airline.
Challenges & Opportunities
Since 2013 the government has made a clearly discernible effort to boost FDI flows. The establishment of the KDIPA has attracted significant levels of international investment, providing more than 1000 direct jobs for Kuwaitis in a variety of sectors, including ICT, oil and gas services and renewable energies, among others. However, imperfect or delayed implementation of parts of the new framework mean that challenges remain. Historically, the country has attracted the lowest amount of FDI in the MENA region, and between 2011 and 2016 the flow of FDI into Kuwait declined from $3.3bn to $275m, according to data from the UN Conference on Trade and Development. In order to reverse this trend, the government has been urged to implement initiatives to make Kuwait’s business environment more attractive to foreign investors. Faster implementation of legal changes, the opening up of the petroleum and real estate sectors to foreign investment, and the increased institutionalisation of the economy are all areas the government could usefully focus on over the coming years. One positive change that has already taken place is the launch of the Permanent Committee for Streamlining the Business Environment in Kuwait. Established by the Council of Ministers and headed by the KDIPA, with technical support provided by the World Bank, the committee is tasked with improving the business environment and raising Kuwait’s position in the World bank’s ease of doing business index.
The potential rewards for the state in enhancing FDI flows are significant, given Kuwait’s fundamental attractiveness to foreign investors. Kuwait has a high quality of life, underwritten by large oil reserves, and a young population of consumers with an appetite for foreign brands and new technology. Costs of inputs such as energy and feedstock for industrial processes are low, while an inexpensive expatriate labour force, combined with tax breaks for foreign investors, further reduce expenses. The business sector is supported by a strong financial industry and a stable and liquid banking segment (see Banking chapter). The nation’s ports, airports and internal infrastructure are of high quality, and the government has demonstrated its commitment to further upgrading infrastructure.
As well as FDI, the government is targeting foreign portfolio investment as a means of further stimulating economic growth. The KSE has historically been a platform that is dominated by local retail investors, with only a small number of foreign individuals and companies directing their investment capital towards the 200 or so stocks listed on its main board. In December 2016 GCC nationals accounted for just 0.6% of buy trades, while GCC companies accounted for around 2%. Non-GCC individuals contributed some 3% to overall trading value over the month, with foreign firms accounting for a similar amount.
However, foreign investment in the KSE is expected to increase in the coming years as a result of a new management company and its ambitious strategic plan. Boursa Kuwait, a private entity, assumed control of the KSE in April 2016 and is in the process of overhauling the exchange in a bid to establish the market as a modern and transparent platform for international investment. By early 2017 Boursa Kuwait, working with the KSE’s regulator, the Capital Markets Authority, had already introduced market making regulations allowing financial institutions to hold an itinerary of stock for which they could offer both buy and sell prices, thereby acting as an easily accessible market for investors to trade in.
Also in the pipeline are short-selling regulations, a segmentation of the market into different bands of stocks that will be subject to separate listing requirements, and enhancing the post-trading model to meet international best practice. Boosting liquidity and transparency have become the guiding principles of the new management, both of which are central to its long-term goal of securing promotion from frontier to emerging market status by influential agencies such as MSCI and FTSE (see Capital Markets chapter).
The fresh urgency in Kuwait’s push to raise both FDI and international portfolio investment is easily understood in the context of recent trading data. Oil and its related products dominate the emirate’s export flows, and the lower oil prices that have prevailed since late 2014 have adversely affected the nation’s trade balance and significantly undermined government revenues. In the years of elevated oil prices prior to 2014, Kuwait’s trade balance recorded high surpluses, reaching approximately KD24.4bn ($80.7bn) in both 2012 and 2013. However, as the effect of the new oil price environment began to appear in trading data, the nation’s trading surplus began a downward trend: in 2014 it declined to approximately KD19.8bn ($65.5bn), and by 2016 it had fallen to around KD4.7bn ($15.5bn).
The erosion of Kuwait’s usually buoyant trade balance has highlighted the correlation between international oil prices and the nation’s current account, and served as a reminder of the importance of economic diversification. Despite lower energy prices, Kuwait’s oil and its associated products still accounted for the vast bulk of the total value of exported commodities in 2016. Mineral products – which include mineral fuel and oils, and products of their distillation – contributed an estimated KD12.5bn ($41.4bn) to Kuwait’s export total over the year, considerably in excess of the second-biggest export category – chemical products – at KD465.5m ($1.5bn) of the total.
In terms of export markets, Kuwait’s status as one of the world’s major oil shippers is reflected in its global trade reach. The biggest recipient of Kuwaiti exported products in the fourth quarter of 2016 was India, followed by neighbours Saudi Arabia and the UAE. The fourth- and fifth-largest recipients of Kuwait’s exports for the period were China and Russia, respectively.
Looking to the developed markets of the West, the US was the eighth-largest export market for Kuwait in the final quarter of 2016, while the UK was the only European market to make it into Kuwait’s top 15 destinations, coming in at 13th place. In terms of imports, China, the UAE, the US, Japan and India are the top five sources of goods flowing into the country. The biggest source of goods from Europe in the fourth quarter of 2016 was Germany, in sixth place, followed by Italy in eighth and the UK in 10th.
Kuwait’s strategy to diversify its exportable goods is contained in the KD34.2bn ($113.1bn) Kuwait Development Plan (KDP) 2015-20, which was approved in February 2015. The plan aims to build on the achievements of the National Development Plan, and is part of a longer-term drive to boost industry and diversify the economy. The strategy comprises over 500 projects across a wide range of sectors, including transport, infrastructure, utilities and energy. Key projects include a $20bn metro rail network, an expansion of Kuwait International Airport and the development of Mubarak Al Kabeer Port on Boubyan Island (see Economy chapter).
In terms of the trading environment, some advances have been made in recent years as part of government efforts to upgrade the processes associated with goods passing in and out of the country. In the area of trading across borders, as measured by the World Bank’s Ease of Doing Business Index, Kuwait still ranks marginally below the MENA average, but climbed a number of places in 2017 thanks to a number of systemic improvements. According to the World Bank, Kuwait’s trading environment was notably improved by the introduction of the electronic exchange of information among the relevant agencies. As a result, the average number of hours taken to achieve documentary compliance for exported goods is 32, compared to a MENA average of 77. The bureaucratic cost to export goods from Kuwait is also low compared to the MENA average, with an average cost of $191 to achieve documentary compliance, compared to $261 in MENA.
As it sets about encouraging trade growth and diversification, Kuwait’s government is greatly aided by the existing array of trade agreements which it is party to. Kuwait is a member of the GCC Customs Union, which enables goods to travel freely between Kuwait, Bahrain, Saudi Arabia, the UAE, Qatar and Oman after an initial 5% duty at the first point of entry to the region. As a member of the GCC, Kuwait is also a beneficiary of two significant regional trade agreements, which have helped to shape its trading patterns over the past decade. The first of these was established in 2008, when Singapore and the GCC inked a free trade agreement (FTA) – a first for the GCC region. The following year, GCC countries successfully concluded their FTA negotiations with the European Free Trade Association, which is composed of Iceland, Liechtenstein, Norway and Switzerland. Kuwait has also established a number of bilateral investment treaties and agreements, which have since been implemented to various degrees. These include agreements with Austria, Belgium, China, Denmark, Egypt, Finland, France, Germany, India, Iran, Italy, Jordan, Malaysia, Morocco, Netherlands, Pakistan, Poland, Russia, Spain, Sweden, Turkey and the UAE.
Kuwait’s objectives of diversifying its export base and increasing FDI are intricately linked. A growing industrial and manufacturing base stands to attract FDI, should the government’s supportive policy, ranging from investor-friendly incentives to state investment in high quality infrastructure, be fully carried out. Kuwait’s ability to attract significantly larger amounts of FDI will depend upon its ability to continue the improvements to its investment environment, building on the considerable progress it has made since 2013. In the short term, the radical overhaul of the KSE offers the quickest returns for the economy, in the form of portfolio investment: the promise of market reform helped the KSE main index to perform better than any other market in the world in January 2017, its 12% rise more than double the gain made by the MSCI Frontier Emerging Markets Index.
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