As a resource-rich economy, Kuwait is diligently looking to deploy its oil wealth to develop and diversify the economy. The nation aims to attract more than $200bn in foreign direct investment (FDI) between 2020 and 2035 in order to become a global centre for trade and finance. The government is taking concrete steps towards achieving its ambitions to boost private sector investment in key sectors.
Vision 2035 & Diversification
Kuwait has revisited its long-term development goals in New Kuwait 2035, a comprehensive national development plan published in 2017 that places economic diversification at the forefront of state objectives. The private sector is vital to achieving this, with active partnerships and privatisation, improvements to the business environment and attracting FDI to harness knowledge from abroad all important moves. Kuwait’s third development plan, which covers the period from 2021/20 to 2025/26, emphasises private sector growth and economic diversification, two areas that are key to creating desirable job opportunities for the population.
Central to the 2035 vision is the Northern Gateway Project, which is intended to attract more than $200bn in FDI and leverage Kuwait’s geographic location to better connect it with other regions. In this regard, a specific focus has been placed on incorporating Kuwait into China’s Belt and Road Initiative (BRI) for global trade. This will be followed by additional development plans, with the aim of first transforming Kuwait into a knowledge economy and then into a smart economy.
Digital transformation is already under way, according to the Communication and Information Technology Regulatory Authority, which has signed memoranda of understanding (MoUs) with Microsoft and Amazon in order to support Kuwait’s efforts to create smart cities, utilise artificial intelligence and cloud service governance, and up-skill citizens.
The 250-sq-km Silk City encapsulates the ambitions of the Kuwaiti government. It is a primary recipient of investment aimed at driving economic diversification and will be a large source of job creation. The $86bn first phase envisions an international airport, rail network, industrial hub and free trade zone for Mubarak Al Kabeer Port, which was half complete as of mid-2019. Additional phases will add an Olympic stadium, the 1-km-high Mubarak Al Kabir tower and housing for up to 700,000 people.
The authorities hope to create 200,000 jobs through the project, which is scheduled to be completed around 2035. The $3.6bn Sheikh Jaber Al Ahmad Al Sabah Causeway connecting Kuwait City to the development in the northern desert area of Subiyah opened in May 2019, and it is the fourth-longest sea bridge in the world at 36 km (see Transport chapter). The plan aims to leverage Kuwait’s merchant trading history and central location, bordering the major markets of Iran, Iraq and Saudi Arabia and acting as a crossroads between the Middle East and Asia, Europe and Africa.
With this vision in mind, Silk City plans to connect with China’s BRI. “Kuwait’s location is better than Dubai in that we are closer to Iraq, Iran, Turkey, Europe and Africa,” Abdullah Al Bader, senior manager of the alternative investment department at local Dimah Capital, told OBG. “Kuwait needs a new business hub with different laws, innovative strategies, strong infrastructure and easy access for travellers and foreign companies.”
Not everyone is as enthusiastic about Silk City, however. When presented with the plan in March 2019, some members of Parliament were critical of attempts to place the project beyond parliamentary oversight, believing that it would create a “state within a state”. There is opposition in Parliament to the concept of Silk City in general, with members of the conservative party expressing concern that the development could lead to liberalisation in sensitive areas, such as allowing the consumption of alcohol.
Officials say that the bulk of the funding for Silk City will come from the private sector, but heightened regional tensions could dampen investor appetite. Stability in neighbouring Iraq and Iran will therefore be a key ingredient to the long-term success of the development. China and its various state-owned enterprises (SOEs) will also be involved in funding some aspects of Silk City, likely taking on a role in managing the port or an economic zone. According to Reuters, an MoU was signed in late April 2019 with China’s Development Bank for development, construction and consultative cooperation.
Inflows of FDI into Kuwait are relatively low in comparison to the amount invested abroad by the Kuwait Investment Authority (KIA), with inflows amounting to KD155.9m ($513.5m) in 2018/19, or a cumulative FDI of KD960m ($3.2bn) between January 2015 and the end of March 2019. While these figures are not transformational, it is not the magnitude that matters to Kuwait, as the country can afford to be selective. As such, Kuwait does not in turn seek avenues of direct investment for the purposes of capital accumulation, but rather is cognizant of added value. This is reflected by the type of investments that multinational companies have made in the country in recent years. For example, General Electric established a technology training centre in Kuwait in October 2016, and in June 2019 Al Mulla Automobiles, the sole distributor of Mercedes-Benz in Kuwait, inaugurated an automotive academy and training centre. These targeted investments are aimed at increasing skills and capacity within the country. They were also linked to investments made by the KIA in these companies, effectively leveraging the nation’s sovereign wealth fund (SWF) for strategic development.
In its vision for 2035 the government aims to boost FDI considerably by the end of the plan’s term. One channel of FDI into Kuwait is regulated by the Kuwait Direct Investment Promotion Authority (KDIPA), which was established by Law No. 116 of 2013. This law marked a significant change in the framework for promoting FDI and grants KDIPA a wide remit. The institution’s responsibilities include processing applications for new investments, promoting Kuwait at international forums, supporting the development of domestic capabilities in an effort to attract FDI, and ensuring progress in terms of technology transfer and job creation for citizens. As a result of the authorities’ efforts, more than 40 foreign companies have invested in Kuwait in areas such as ICT, health, renewable energy, education and entertainment.
The 2013 law also made a series of improvements to the investment framework and established incentives for overseas companies in Kuwait. These include allowing 100% foreign ownership of a firm operating in Kuwait in almost any sector and the establishment of 100% foreign-owned branches in Kuwait. In addition, foreign investors are permitted to set up representative offices in Kuwait, which enables them to test the market before fully committing.
There are also a number of tax exemptions that foreign investors are able to qualify for through KDIPA, including exemption from a 15% corporation tax, and exemption from a 5% Customs tax on raw materials and construction equipment. In order to continue qualifying for these exemptions, foreign companies are required to meet the performance criteria laid out in their investment application.
The Kuwait Authority for Partnership Projects (KAPP) is another important institution supporting investment in the country by developing the public-private partnership (PPP) model. KAPP was established in 2015 following the passing of a new PPP law in 2014. Its responsibilities include assisting other government entities in developing PPP projects and identifying potential opportunities for partnerships with private investors.
In 2018 KAPP revised Kuwait’s PPP Project Guidebook and helped get the $1.6bn Umm Al Hayman wastewater treatment plant to commercial close under the law, working in partnership with Germany’s WTE Wassertechnik and local firm International Financial Advisors, which won the development contract. Another successful development built under the PPP model is the Al Zour North independent water and power project, which began in 2013. In the first phase of the project approximately $1.4bn worth of contracts were awarded.
Contracts for a third solid waste treatment facility located 35 km from Kuwait City have been awarded and were awaiting final approval in mid-2019 before commercial close. The project was won by a consortium of France’s Constructions industrielles de la Méditerranée and Kuwait’s Al Mulla Group in August 2017, and was approved by the Council of Ministers at the same time as the Umm Al Hayman plant.
The privatisation of SOEs could offer significant opportunities for investors, building on the successful privatisation of Boursa Kuwait in 2019. A number of foreign investors took up stakes in Kuwait’s stock exchange, which, in addition to capital, will bring a great deal of knowledge, experience and skills to the local capital markets. Recent reform and development of capital markets in Kuwait has been extremely successful and is likely to continue in the years ahead. The exchange has already attracted significant inflows following upgrades by global equity index providers such as MSCI and FTSE Russell (see Capital Markets chapter).
KDIPA was established with the aim of improving Kuwait’s business environment based on its position in the World Bank’s annual ease of doing business index. To this end, the authority was put in charge of the Permanent Committee for Streamlining Business Environment and Enhancing Competitiveness in the State of Kuwait. Alongside its member institutions, KDIPA has coordinated efforts to improve the country’s score across the index’s 10 indicators.
In the 2019 iteration Kuwait ranked 97th out of 190 economies, compared to 102nd in 2017 and 96th in 2018. Kuwait performed well in the category of paying taxes (seventh), but needs to improve its trading practices in terms of time and cost (159th).
A number of developments are likely to boost the country’s ranking in the years ahead. The establishment of Ci-Net, a credit information agency, should go a long way to increasing access to credit. New regulations from the Capital Markets Authority to protect minority investors, updated rules for listed companies and inclusion in global equity indices should also help support Kuwait’s overall score. Teams have been incorporated into various ministries with the express objective of enacting reforms that will support the business environment. There are a number of areas where improvements are taking place, including credit access, starting new companies, property registration, construction permits and intellectual property rights. In a preliminary announcement for its “Doing Business 2020” report, the World Bank placed Kuwait among the top-20 economies that improved the most on the ease of doing business index score.
Nonetheless, there is still considerable room for improvement. “The main challenge to improving the business environment in most of the developing countries is changing the mindset of government bureaucracy,” she added. “Officials must realise how each one of them plays an integral part in attaining the country’s long-term development agenda. Quality training and continuous learning is crucial to ensure effective government and to achieve citizen engagement in policy-making.”
The institution responsible for outward investment is the KIA, which was founded in 1953 and is the oldest SWF in the world. The institution has, to date, declined to formally report its total assets or investment strategy, but estimates from the IMF put the KIA’s holdings at approximately 400% of GDP at the end of 2018, or some KD172bn ($566.5bn). According to the SWF Institute, the KIA is the fourth-largest SWF in the world, after Norway’s Government Pension Fund Global, the China Investment Corporation and the Abu Dhabi Investment Authority.
The KIA oversees two investment accounts: the General Reserve Fund (GRF), established in 1953, and the Future Generations Fund (FGF), launched in 1976. The FGF is approximately twice the size of the GRF, as the government has annually deposited at least 10% of state revenue in the former since its creation. Meanwhile, the GRF receives all government revenue, and is used to transfer payments to the FGF and other state accounts as needed. An estimated 80% of assets in the GRF are held in cash, and the remaining 20% are invested in short- and medium-term assets in Kuwait and the MENA region. The FGF invests 100% of its holdings overseas, targeting long-term assets across diversified geographies and asset classes. By law, funds cannot be withdrawn from the FGF without prior government approval; the only known withdrawal from the FGF was made following the 1990-91 Gulf War, when Kuwait took $85bn to fund rebuilding. According to the Central Bank of Kuwait (CBK), direct investment abroad totalled KD1.1bn ($3.7bn) that year, down by 58% from KD2.7bn ($8.9bn) in 2017.
Not passing a new debt law in mid-2019 has implications for the different funds within the KIA. The old debt law expired in 2017, and Parliament could not agree to increase borrowing when the money would simply go into the SWF to be invested at a lower return than the cost of borrowing. The government has therefore been unable to issue debt since October 2017, and sizeable fiscal deficits are expected once transfers to the FGF and investment income are deducted. It is likely that a deficit will be financed by drawing on the GRF. The IMF estimates that the GRF has the equivalent of 54% of GDP in assets for FY 2019/20, thus there are plenty of resources in place to finance a deficit. However, this amount could fall in the coming years.
Kuwait is strengthening the framework for overseeing these important national wealth funds. An asset-liability committee was created in 2018, which includes the Ministry of Finance, the CBK, the KIA and the Kuwait Petroleum Corporation. According to the IMF, this will improve coordination and help form a more systematic view of asset-liability management, weighing the costs and benefits of borrowing and investment, including the implications on GRF liquidity buffers, central bank reserves, domestic liquidity and debt market development. In this regard, publishing an issuance calendar and moving to market-based auctions to allow for price discovery is likely to help deepen debt markets.
Oil is Kuwait’s main product export and it dominates the trade accounts. In 2018 the nation sold some KD19.7bn ($64.9bn) of the commodity, which represented 90% of total exports. In addition to crude oil, exports include a number of oil-related products, such as petrochemicals, as well as some non-oil exports, such as motor vehicles, telecommunications hardware and live animals.
Kuwait’s domestic production capacity is limited, and the country imports a significant percentage of products consumed by the local population, although the amounts are still small relative to oil exports. In 2018 product imports totalled KD9.5bn ($31.3bn), mainly comprising motor vehicles, mobile phones, pharmaceuticals, cigarettes, jewellery, gold, oil-drilling equipment and food. Overall, Kuwait’s trade balance has matched the evolution of oil prices, rising to a peak surplus of KD27bn ($88.9bn) in 2012 before plunging to KD6bn ($19.8bn) in 2016 and then climbing to KD12.4bn ($40.8bn) in 2018.
Boosting trade – specifically non-crude oil trade – is one of the key objectives of the New Kuwait 2035 vision through positioning the country as a global centre for the petrochemicals industry, as well as for trade more generally. To build the foundations for this ambition, Kuwait is investing heavily in infrastructure to encourage trade, with multiple new ports and airports under construction.
Kuwait has shown its commitment to the long-term goal of creating a supportive and attractive environment for trade and investment to drive economic diversification for a more sustainable future. With major projects in the pipeline supported by foreign investors, a healthy number of companies already active in the Kuwaiti market, the desire to integrate with global trade routes and ample financial resources at the state’s disposal, the outlook for trade and investment appears positive barring another period of sustained low oil prices.
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