New investment opportunities open up across a range of sectors in Kuwait

 

With billions of dinars worth of short-term spending plans and a new vision for economic transformation over the next two decades, Kuwait offers opportunities for investment across a range of sectors. While the country adopted a save and prosper approach during the oil boom years of 2010-14, the prolonged reduction in oil prices experienced since then has coincided with a renewed appetite for investment and reform that bodes well for private sector players.

“While government revenues in the GCC have been impacted by falling oil prices, the financial resources of most private institutions are much further removed from oil price fluctuations and do not depend on state budgets,” Abdulwahab A Al Bader, director-general of the Kuwait Fund for Arab Economic Development (KFAED), told OBG. “Therefore, many private institutions, including development operations at the KFAED, have not been adversely affected.”

Wealth & Welfare

Kuwait’s oil industry was nationalised in the 1970s and for the subsequent four decades its small but growing population of citizens has enjoyed the fruits of its hydrocarbons endowment. On a per capita basis, Kuwait is far wealthier than its larger neighbour Saudi Arabia, for instance. In 2017, when the two countries agreed to curb crude oil production as part of the strategy of the Organisation of the Petroleum Exporting Countries (OPEC) to drawdown global oil supplies, Kuwait agreed to cut its output to 2.7m barrels per day (bpd), while Saudi Arabia reigned back its output to just over 10m bpd. Kuwait has 1.34m citizens compared to just over 20m citizens in Saudi Arabia, so at the start of 2017 crude oil output in the two countries was the equivalent to two bpd for every Kuwaiti and half a barrel for every Saudi national.

When Kuwait and Saudi Arabia nationalised their oil industries in 1975 and 1980, respectively, their citizen populations were much smaller and at those times the per capita production was 6.5 barrels per Kuwaiti citizen and 1.6 barrels per Saudi national. Kuwait has distributed this oil wealth through the establishment of a welfare state that provides its citizens with free health care and education, highly subsidised water, electricity and petrol charges, and the promise of free land on which to build a home. Public sector employment is another means through which the authorities have sought to redistribute the country’s wealth. In 2017 the average monthly tax-free pay for the 343,340 Kuwaitis on the government pay roll was KD1470 ($4863), or KD17,640 ($58,400) per annum. That works out to the equivalent of $163 a day – a little over the value of three barrels of Brent crude in March 2017 – for an occupation with a generous pension, long holidays and other perks. About 80% of Kuwaitis in the workforce work for the public sector, according to the Public Authority for Civil Information, with fewer than 90,000 Kuwaiti nationals in the private sector, accounting for 4% of the 2.2m people employed by businesses in the country.

Private Enterprise

However, government salaries are not the only income stream for many Kuwaiti citizens. The law prohibits foreigners from owning property, so the 3m non-Kuwaitis living in the country pay rent to Kuwaiti landlords, as are their employers for business premises. Many Kuwaitis also earn money from overseas investments.

According to the most recent 2013 Kuwait Central Statistical Bureau (KCSB) survey, the average monthly household income for Kuwaitis was approximately KD3351 ($11,100) in 2013, with 72% of income from salaries, 3% from business activities, 2% from non-financial investments, 21% from transfers from the government and 2% from other sources. A report from the Dubai Land Department revealed that Kuwaitis invested $544m in the emirate’s real estate market in 2016 alone. Further afield, London has been a favourite market for investment property purchases by both individuals and institutions. According to Reuters, the Kuwait Investment Authority (KIA) spent $24bn on London property in the 10 years leading up to 2013.

Sovereign Wealth Funds

The KIA, which is chaired by Kuwait’s minister of finance, Anas Khalid Al Saleh, administers two sovereign wealth funds (SWFs) that distribute the benefits of the country’s oil wealth. The General Reserves Fund (GRF), which was established in 1952, plays a crucial role in day-to-day fiscal management, while the Future Generations Fund (FGF), established in 1976, manages a portfolio of investments outside Kuwait and by law receives 10% of net income each year, as well as 10% of government revenues. From 2011 to 2013, during the spike in oil prices, Parliament approved a transfer of 25% of government revenues to the FGF. Although the figure has not been verified by the KIA, the Sovereign Wealth Fund Institute estimates the SWFs have combined assets of $592bn (see analysis).

Traditional Discourse

Despite its vast wealth, there have been delays in recent years when it comes to major development projects, with the state’s bureaucracy often cited as a significant concern. The World Economic Forum’s “Global Competitiveness Report 2016-17” ranked Kuwait 38th out of 138 economies, but cited government bureaucracy, restrictive labour regulations and corruption as among the most problematic factors for businesses in the country. However, it is worth noting that these outside perspectives can fail to take into account that Kuwait’s decision-making processes are a key aspect of its traditions.

Kuwait is very proud of its culture of diwaniah, an ancient tradition in which men gather to socialise and discuss a range of issues from family matters and current affairs to business and politics. One eminent Kuwaiti sociologist and diplomat, Fahad Al Naser, has published academic articles on the importance of the institution, explaining that diwaniah helped citizens to cope during the Iraqi occupation. Drawing on a network of family and social ties, the diwaniah system reflects a Kuwaiti belief in free speech, which in the political arena sets it apart from many of its neighbours.

Since independence in 1961, Kuwait has had 16 parliamentary terms. In the most recent election in November 2016, 483,000 Kuwaiti men and women were able to vote in the contest to elect 50 representatives. Women were given the right to vote and run in elections in 2005, and in the most recent poll one woman, Safa Al Hashem, was elected from 15 female candidates. In Kuwait Cabinet ministers and the prime minister are appointed and many are members of the ruling family. Ministers can be questioned and held to account by members of parliament, who can also demand amendments to new legislation. The 2016 election saw 24 seats out of 50 going to parliamentarians representing opposition groups, who had boycotted the previous two elections. While the parliamentary system, which is unique in the Gulf states, has been cited as a source of stability, it has also been described as a reason for delay in the delivery of strategic policy objectives.

Development Plans

Although this stop-start approach to project implementation has caused delays to several major development projects in the country, many are now moving ahead as planned. A report by the Public Authority for Housing Welfare indicates that 36,000 homes will be built in 2017 to ease the pressure associated with the growing number of citizens waiting to benefit from the free home, apartment or plot of land awarded by the state to Kuwaiti citizens when they marry. Meanwhile, the construction of a new airport terminal at Kuwait International Airport with three times the capacity of the current airport is now moving ahead after the KD1.3bn ($4.3bn) contract was re-awarded to Turkey’s Limak Holding following the original contract’s withdrawal in 2015. The Amiri Diwan has in the meantime granted a KD52m ($172m) contract to build a passenger support terminal capable of handling 4.5m people annually while the larger airport is being built, and stipulating that the passenger support terminal would have to be completed in 450 days from the contract signing in November 2016.

In 2014, as global oil prices dramatically fell, Kuwait awarded KD7.5bn ($24.8bn) worth of contracts for major projects, which National Bank of Kuwait noted was almost four times the value of awards the previous year and equivalent to all the projects given the go-ahead in 2011 to 2013. In 2015 the value of projects awarded rose to KD12bn ($39.7bn), while in 2016 KD5.6bn ($18.5bn) worth of contracts were signed. Many of these projects came under the auspices of the 2015/16-2019/20 National Development Plan (NDP), which included provisions of KD34bn ($112.5bn) for expenditure on 521 projects, 421 of which had been carried over from the previous five-year plan. The combined total of approved development schemes in 2014, 2015 and 2016 came to just over KD25bn ($82.7bn), suggesting that almost KD10bn ($33.1bn) of funding is in the pipeline over the final three years of the NDP. “The NDP has a specific focus and a clear objective to position Kuwait in the top 35th percentile of global competitiveness indices and major international indicators by 2035,” Khaled Mahdi, secretary-general of the Supreme Council for Planning and Development, told OBG. “Effective prioritisation and methodology as it is carried out will enable the mid-range plan to provide a unified national direction for strategic planning in Kuwait within the longer-term goals of the New Kuwait vision.” The generation of so many schemes in recent years has created multi-billion-dollar deals for international companies including Spain’s Tecnicas Reunidas, US’s Schlumberger, Petrofac from the UAE and Turkey’s Limak Holding, as well as for firms from South Korea and China, including Hyundai Heavy Industries and Sinopec.

PPP Projects

However, there is scope for deeper investment by foreign firms and private businesses in Kuwait thanks to a new administrative and legislative framework that has enabled Kuwait’s first two public-private partnership (PPP) agreements to deliver tangible results. In December 2016 two key milestones were achieved by PPPs in Kuwait: the Al Zour North phase one independent water and power project (IWPP), which is 40% owned by private companies, became fully operational, supplying the country with electricity and water; and Health Assurance Hospitals Company, known as Dhaman, in which Arabi Holding Group has a 26% stake, signed a KD162m ($535.9m) deal with the China Metallurgical Group Corporation to build, equip and operate two hospitals with a combined total of 600 beds by 2019. National Bank of Kuwait (NBK) estimates there is a pipeline of PPP projects with a total value of KD10bn ($33.1bn) in the tendering or pre-tendering stage in Kuwait. PPPs are administered by the Kuwait Authority for Partnership Projects, which took over the function, with additional powers from the Partnerships Technical Bureau.

Capital Market

The equity agreement underpinning the Al Zour North phase one IWPP plant saw the Kuwait government holding a 60% stake during the construction phase, with a mandate to offer 50% of the equity in the scheme to the people of Kuwait through an initial public offering (IPO) restricted to Kuwaiti citizens. In March 2017 NBK Capital was selected to lead the advisory team for the IPO, which is expected to take place before the end of 2017. With the second phase of Al Zour North in the project pipeline, along with another IWPP, Al Khairan, the PPP model could lead to a number of new IPOs in the years ahead. Among them will be the body that owns the exchange itself. The Kuwait Stock Exchange (KSE) became the first public entity to be privatised in April 2016 when ownership was transferred to Kuwait Bourse Company, known as Boursa Kuwait, in line with the Capital Markets Authority Law No. 7 of 2010. Boursa Kuwait subsequently took over the operation of the KSE in October 2016. Boursa Kuwait has announced it will itself be the subject of an IPO available to Kuwaiti citizens in due course. According to KAMCO Research, there were 14 IPOs in Kuwait from 2001 to 2016, and so the PPP strategy may also serve to reinvigorate interest in Kuwait’s exchange.

Taking Stock

In early 2017 Kuwait was also taking stock of its own financial position as it assessed export revenues, fiscal balances and the effectiveness of the historic cuts implemented at the start of the year by OPEC members in partnership with some nonOPEC countries, including Russia. Data from the KCSB showed oil revenues in 2016 had fallen to their lowest level in more than 10 years, to KD12.5bn ($41.4bn), or 93% of total national exports, and 53% lower than the KD26.8bn ($88.7bn) in oil exports the country had sold in 2014. According to the IMF, crude oil accounted for 82% of government revenues in 2013, but fell to 67.5% in 2016. However, oil revenues are expected to rise to 70% in 2017, anticipating a rise in crude prices.

Kuwait, a founder-member of OPEC, chaired the committee formed to monitor the implementation of promised reductions by those party to the Vienna agreement – OPEC’s first production reduction since 2008. As the ministers gathered for their meeting, Brent crude was trading at around $54 a barrel, above the price being quoted for Brent crude futures for January delivery on the day the Vienna deal was struck in November 2016. Although that price was not far below Kuwait’s fiscal breakeven oil price of $52.80 for 2017 estimated by the IMF in April 2016, it was below the estimates for other GCC states with the breakeven figures for Qatar, Saudi Arabia and the UAE put at $54.70, $70.20 and $71.70, respectively. By the end of May 2017 OPEC had agreed to continue the output reduction for a further nine months in order to reduce global inventories and produce an increase of crude oil prices.

Deficit Controls

The OPEC meeting took place a month after the start of Kuwait’s new fiscal year in April, and its budget was anticipating a deficit of KD7.9bn ($26.1bn) after mandatory transfers to the FGF. The budget forecast oil revenues of KD11.7bn ($38.7bn) based on a price of $45 a barrel. After covering the previous two years of deficit through drawdowns from the GRF and domestic debt, in March 2017 Kuwait tapped international debt markets for the first time, raising $8bn. Despite the ongoing uncertainty over oil prices, the savings in Kuwait’s SWFs portfolio, and the manageable size of the deficit, have left the IMF and ratings agencies confident it can ride out a period of reduced oil prices over several years and maintain its “AA” credit status. The IMF stated in January 2017 that if Kuwait kept up the recent pace of project implementation, non-oil GDP growth of up to 4% could be expected until 2021, assuming there was no further volatility in global oil prices or increased regional instability.

Reform Agenda

The IMF also welcomed the government’s long-term reform agenda, New Kuwait, which sets wide-reaching goals for socio-economic change to be achieved by 2035. In its 2017 Article IV report, the IMF lauded plans to promote a greater role for the private sector to create more employment opportunities for citizens, and said ongoing efforts to reduce subsidies on fuel and utilities were a “step in the right direction”. However, in April 2016, under the last Parliament, lawmakers refused to pass a bill reducing subsidies on electricity and water tariffs. Subsequently, they agreed to implement the reforms if they were only applied to the homes and businesses of the country’s 3m expatriates and exempted 1.34m Kuwaiti citizens. The change meant electricity charges in apartment buildings rising from KD0.002 ($0.001) per KWh to KD0.015 ($0.05), and reaching KD0.025 ($0.08) for commercial premises. Water charges were to be doubled, with the changes taking effect from September 2017.

Subsidies & Oil Prices

On September 1, 2016, prices of petrol rose by between 40% and 80%, depending on the grade, in another subsidy reform. According to IMF estimates, the average price went up to $0.31 a litre, cheaper than anywhere else in the Gulf, except Saudi Arabia. However, a month later the law was challenged in court and the government ordered to abolish the increase, a move that was followed by the dissolution of Parliament and a snap election. Many of the 24 opposition parliamentarians subsequently elected had campaigned against the removal of subsidies, and by March 2017 they had issued a demand to cross examine the prime minister and three ministers over the reforms. During the earlier debate in April 2016, local media reported that the Ministry of Electricity and Water had told parliament that if subsidies remained and consumption of electricity and water continued to grow, subsidies would cost the government $25bn by 2035. In an October 2016 report, the IMF calculated that the implicit cost of energy subsidies as a proportion of GDP was 7.2% in Kuwait, compared to 4.2% in Saudi Arabia, 3.6% in Bahrain and 3.5% in Qatar, with the cost in the UAE, where subsidy reductions have been imposed more rigorously, amounting to 0.8%. In monetary terms, the IMF said the explicit cost of subsidies across all six GCC countries in 2016, excluding the UAE, was $10.9bn, with Kuwait’s share accounting for $7.8bn.

The increase in fuel prices does appear to have contributed to a significant decline in consumer confidence, according to an economic report produced by NBK. The bank noted that despite growth in employment and salaries in the government sector, the Ara Research and Consultancy consumer confidence index fell markedly in August 2016, and had remained quite low going into the first quarter of 2017, particularly among Kuwaiti households.

Taxation

The changes in policy on subsidies were part of a wider package of fiscal reforms agreed on by the Cabinet in 2016. The government announced it was planning to introduce a 10% corporate income tax to replace existing levies on foreign businesses and a number of smaller fees for Kuwaiti firms. Value-added tax (VAT) at 5% is set to be introduced in GCC countries. The UAE have announced the tax will be introduced on January 1, 2018, while NBK expects the levy will not be introduced in Kuwait until 2019. It predicts the combined impact of new taxes and subsidy reform could reduce the fiscal deficit by 4-5% of GDP within five years. The IMF has estimated that if Kuwait introduces a 5% VAT rate, as well as new taxes on sugary drinks and tobacco, government revenues could be increased by 1.75% of GDP, which would mitigate, to some extent, against recent falls caused by lower oil prices.

Employment Reform

Another element of the government’s reform strategy involves public sector employment, skills and training. Kuwait has not reacted to the decrease in oil prices by reducing pay or benefits for public sector staff, but the government did announce a two-year-long programme including changes to civil service salaries and the introduction of performance evaluations.

This forms part of a broader move to ensure more Kuwaiti citizens have a skill set that is compatible with private sector work, while also attempting to introduce structural reforms that encourage a more flourishing private sector. The IMF estimates that in the five years from 2017, the private sector will only be able to provide employment roles for a quarter of young citizens entering the job market. This suggests the government will have to offer them jobs at a greater cost to the state, or risk rising unemployment among young nationals. Majeed Al Turkait, chairman and CEO of the Gulf Business Services and Recruitment Group (Kanee), told OBG, “Kuwait is working to shift the focus of the economy from the public sector to the private, and the labour force is at the heart of this transition. In addition to encouraging people to look for private sector employment rather than seeking government jobs, there has to be recognition of the cultural differences between these work spaces.”

National Fund

In 2013 Kuwait sought to address part of this issue by establishing the National Fund for Small and Medium Enterprise Development as an independent public corporation with funding of KD2bn ($6.6bn). Its mission is to fund up to 80% of capital for small and medium-sized enterprises (SMEs) that employ 1-50 Kuwaitis and have financing requirements of up to KD500,000 ($1.7m). Its role is to lay the foundations for economic opportunities in the private sector for Kuwaitis, and to help nurture SMEs to contribute to economic growth. In partnership with local banks, the first funding round began in March 2016, with 59 projects successfully raising capital, including 24 commercial enterprises, 21 service sector companies, 12 light manufacturing firms and two agricultural businesses. In October 2016 the Manpower and Government Restructuring Programme agreed to accept responsibility for paying salaries equivalent to similar public sector posts to all Kuwaiti entrepreneurs setting up SMEs through the fund. The fund’s next objective is to establish sector-specific hubs and incubators focusing on light manufacturing, ICT and creative industries.

Outlook

While efforts are being made to transform Kuwait’s economy, the government faces short-term challenges to persuade members of Parliament and citizens that the social contract between them and state is not being eroded. However, through funding mechanisms such as PPP agreements, as well as capital projects funded by state-owned enterprises, there are opportunities for international firms. The government is actively seeking to attract foreign direct investment and is highlighting ICT, renewable energy and finance as sectors it would like to see developed by using international expertise over the following two decades.

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The Report: Kuwait 2017

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