A worthwhile partner: Recent and upcoming reforms are expected to help boost competitiveness

In recent years Kuwait has seen steadily expanding trade activity with neighbouring countries – including the member states of the GCC and other Middle East nations – and a variety of key partners further afield. At the same time, the government has introduced a substantial amount of new legislation in an effort to boost foreign direct investment (FDI) and, in turn, develop the nation’s non-oil economy.

In August 2014, for example, Kuwait’s parliament passed a new public-private partnership (PPP) law, which, when fully implemented, is expected to have a far-reaching positive impact on financing and business activity in the country. Similarly, in the same month the Kuwait Petroleum Corporation (KPC), the country’s state-owned oil company, finalised a deal with China to double the amount of daily Kuwaiti oil exports to China over the next decade. Both the new PPP legislation and the China trade deal are widely considered to be representative of increasingly dynamic, outward-looking trade and investment policy in Kuwait.

“The state of the region’s investment climate is inviting,” Fawaz Al Ahmad, general manager of the Kuwait Investment Company, a major domestic player, told local media in 2014. “The countries are continuously adopting policies and introducing measures to improve this climate, taking into consideration changes in the international economic climate.”

Strong Fundamentals Kuwait’s economy has performed well in recent years. According to IMF data, in 2014 non-oil economic growth was 3.5%, up from 2.8% in 2013, for example. Both of these figures are broadly in line with non-oil economic growth since around 2012, when the country’s economy stabilised after recovering from the 2007-08 global financial crisis. In general Kuwait’s non-oil economy has mirrored the GCC’s non-oil economy since 2005.

Kuwait and the GCC region as a whole saw an uptick in non-oil output from 2005 through the end of 2007, for example, followed by a steep drop-off in the wake of the global economic downturn, and then a rapid recovery in 2009-10, followed by a period of stagnation and then slow but steady growth.

Since 2011-12 non-oil sector expansion has been fuelled primarily by consumption, which has, in turn, been driven by a series of wage and subsidy increases enacted after the downturn and a loosening of retail credit facilities in the banking sector (see Banking chapter). Capital spending on the part of the government has also contributed to non-oil growth – primarily in the areas of construction activity, real estate (housing) and infrastructure – although to a limited degree.

The 2010-14 National Development Plan, the initiative under which the government aimed to revitalise the country’s transport and communications infrastructure, among other major projects, was delayed and debated as a result of bureaucratic disagreements. As the IMF put it in the organisation’s 2014 Article IV consultation paper on Kuwait, “Frequent changes in governments since 2006 partly delayed the implementation of some mega-projects.”

Financing Expansions

Despite the recent history of growth in the non-oil sector described above, like many of its neighbours Kuwait will likely continue to rely on hydrocarbons revenues for years to come.

According to a December 2014 report released by international corporate ratings firm Fitch Ratings, a dependence on oil income represents one of the nation’s primary challenges moving forward. The oil industry currently accounts for around 40% of Kuwait’s GDP and some 80% of government revenues.

The rapid decline in oil prices that began in mid-2014 – at which point the price of Brent Crude was in excess of $110 – and bottomed out at around $50 per barrel at the end of the year has exacerbated the situation of every country that relies on oil revenues to support a domestic economy. In some respects, however, Kuwait is better prepared to weather the effects of lower oil prices, with the country’s fiscal break-even oil price coming in below $50 per barrel. At the same time, in recent years the country has continued to work on diversifying its economy away from oil revenue. A series of key policies instituted since the early 2000s have focused on encouraging the development of the private sector, facilitating good governance throughout the economy, improving the competitiveness of the domestic workforce, facilitating and encouraging entrepreneurship, building the small and medium-sized enterprises segment, and, importantly, boosting both FDI and trade. Indeed, these latter two areas constitute central pillars of the government’s financing programme for the 2015-20 Kuwait Development Plan (KDP), which was formally approved in February 2015.

The initiative, which is being touted as a renewed and expanded version of the previous 2010-14 five-year development programme, will rely on and seek to build up Kuwait’s numerous beneficial trade relationships as well as the country’s status as a leading investment destination in the Middle East region.

Trade in Figures

In 2014 Kuwait exported goods worth KD28.7bn ($98.8bn), down 11.3% from 2013, and imported KD9bn ($31bn) in goods, up 7.9% from the previous year, according to figures from the nation’s Central Statistics Bureau (CSB). Meanwhile, the volume of trade dropped 7.4% in 2014.

Provisional CBS data shows that exports continued to decrease in 2015, declining 46% to KD4.07bn ($14bn) in the first quarter of the year, compared to the same period in 2014. Imports were up 11.1% to KD2.3bn ($7.9bn). Oil and other mineral fuels remain Kuwait’s most important export by a considerable degree, accounting for KD3.6bn ($12.4bn) of exports, or 88.8% of the total, in the first quarter of 2015. The country’s second-most-valuable export category was organic chemicals, which were worth KD102.6m ($353.5m) in the same period, or around 2.5% of the total, followed by vehicles other than railway or tramway rolling-stock and parts and accessories, which were worth KD62.2m ($214.3m), or 1.5% of the total.

Imports were slightly more evenly divided in the first quarter of 2015. Vehicles other than railway or tramway rolling-stock and parts topped the list, with 14.9% of total imports valued at KD346m ($1.2bn), followed by electrical machinery and equipment, at KD302.5m ($1bn), or 13% of the total. In the third and fourth spot were boilers, machinery and mechanical appliances and parts, at KD285m ($981.9m), or 12.2% of all imports, and pearls, precious and semi-precious stones, at KD92m ($317m), or some 3.9%. The balance of trade in the first quarter of 2015 was KD1.74bn ($6bn), a 68% decrease from KD5.4bn ($18.6bn) in the same period in 2014, according to figures from the CSB.

Key Partners

In terms of non-oil exports, the UAE was Kuwait’s primary trade partner in the first quarter of 2015, with some KD68.4m ($235.7m) in Kuwaiti goods going to the country. This was followed by China, which purchased KD62.6m ($215.7m) of Kuwaiti goods, and Saudi Arabia, which bought KD53.9m ($185.7m) in the same period. Imports into Kuwait came first from China, which sold Kuwait KD402.5m ($1.39bn) in goods, then the US, with KD229.4m ($790m). The UAE, with KD200.3m ($690.1m) and Japan, with KD153.1m ($527.5m), occupied the third and fourth places of top importers into Kuwait.

Kuwait has trade agreements with a wide range of countries around the world. The nation has had close ties with its neighbours in the Gulf on an individual basis since the 1970s, and on a group basis (as the GCC) since the early 1980s. Kuwait signed a trade agreement with Saudi Arabia in 1970, followed by Bahrain and the UAE in June 1973 and Qatar in 1978. In 1981 the GCC member states finalised a Unified Economic Agreement, which remains in place today.

In the first quarter of 2015 Kuwait’s exports to other GCC countries increased 20.3% to KD168.9m ($581.9m) as compared to the same period in the previous year, according to figures from the CSB. GCC countries accounted for 4.2% of total Kuwaiti exports, up from 1.9% in the first quarter of 2014.

Trading In Energy

Much of Kuwait’s oil trade takes place in the context of regional GCC agreements with foreign buyers. As of late 2014 Saudi Arabia was China’s leading source of oil, providing some 1.2m barrels per day (bpd) on an annual basis, which is equal to around 20% of China’s total oil imports. Kuwait, meanwhile, currently supplies around 150,000 bpd to China. However, as previously mentioned, under a new 10-year contract with the China Petroleum and Chemical Corporation – known colloquially as Sinopec – signed in August 2014, KPC will boost its exports to the East Asian giant substantially over the course of the coming decade. In the first few years of the new contract, Kuwait will send around 300,000 bpd to China, but according to KPC executives this figure could rise to between 500,000 and 800,000 bpd before the decade is up. More than 10% of Kuwait’s total annual production will eventually be exported to China. The Kuwaiti deal follows similar oil export expansion contracts between China and other GCC member states as well. In 2014 Qatar ramped up oil exports to China from 5.5% to 6.6% of China’s total oil imports.

Given the importance of the oil sector to Kuwait’s foreign trade, it is perhaps not surprising that the government is currently in the midst of a major investment initiative to boost the nation’s production capacity from around 3m bpd currently to at least 4m bpd by 2020, according to the IMF’s 2014 Article IV consultation report. As part of this expansion the nation will also work to increase domestic refining capacity and the petrochemicals segment (see Energy chapter).

Japan is another major purchaser of Gulf crude. Some 96.8% of the GCC’s total exports to Japan were made up of crude oil, refined oil products, liquefied natural gas and other related products. In the reverse direction, Japan sends vehicles, machinery, electronics and electric equipment, and steel to the Gulf.

Investment Performance

In the World Economic Forum’s 2014-15 “Global Competitiveness Report”, which ranks nations on metrics related to economic attractiveness, Kuwait occupies a space near the bottom of the list of 144 countries in terms of FDI and technology transfer, coming in at 141. The report cites a variety of reasons for the placement, including the fact that Kuwait has one of the lowest rates of incoming foreign investment not only in the Gulf, but within the greater Middle East as well. In 2014, for example, FDI inflows into the country were at $485.8m, down an estimated 66% from the previous year, according to figures from the UN Conference on Trade and Development. However, according to the economic research arm at National Bank of Kuwait (NBK), since 2009 Kuwait has seen a series of high-value corporate acquisitions of domestic firms, mainly by foreign players. One of the largest of these was the $1.8bn Qatar Telecom takeover of Kuwaiti firm Wataniya in 2012.

At the same time, in 2014 Kuwait was the single largest source of FDI outflows in the GCC, with around $13bn. A considerable amount of this spending is carried out by the Kuwait Investment Authority, the nation’s sovereign wealth fund, which as of 2015 has some $548bn under management, according to the US-based Sovereign Wealth Fund Institute, making it the world’s fifth-largest sovereign wealth fund.

Prior to 2001, foreigners were not allowed to engage in any commercial business activity in Kuwait without a local partner, who was required to be the dominant shareholder. This rule was codified under the Commercial Law No. 68 of 1980. In 2001 Kuwait’s government introduced the new FDI Law No. 8, which – like other similar pieces of legislation rolled out in the Gulf region in the same period – was meant to facilitate and secure FDI in the country. Under the 2001 FDI Law foreigners were given the right to own up to 100% of a business in Kuwait in a handful of strategic sectors, including insurance, infrastructure development, housing, tourism, health care and entertainment. Many of these sectors continue to be key areas of focus under Kuwait’s economic diversification programme today. While Law No. 8 allowed for a better operating environment for foreign-owned businesses, it did not generate the rush of investment that the government had initially hoped to see. Furthermore, many potential investors into Kuwait called off their plans in response to the implementation delays of the government’s 2010-14 economic development plan. More recently, and in an effort to address these and other issues, the government has introduced new pieces of legislation aimed at boosting FDI in the coming years. A new FDI Law (No. 116) was introduced in June 2013. Prior to the formulation of this new bill, the Kuwait Foreign Investment Bureau (KFIB) and various other government entities spoke with major foreign investors to ensure that the new law met their requirements. One of the significant outcomes of the law was the establishment of the Kuwait Direct Investment Promotion Authority (KDIPA), which replaced KFIB as the country’s primary FDI authority.

All In the Details

In mid-December 2014 KDIPA released the Executive Regulations on Law No. 116 of 2013, which included a large number of new details about the law. Under this FDI law, foreign investments can take one of three forms, namely a Kuwaiti company with 100% foreign equity, a branch of a foreign company involved in direct investment activities of various sorts, or a representative office that does not carry out commercial activity. As under the 2001 law, the government restricts the sectors that allow 100% foreign ownership, though under the most recent law the state released a list of sectors that are excluded from 100% foreign-owned participation. These include the oil and gas industry, production of fertiliser and nitrogen compounds, the production and distribution of gas via pipeline, most real estate activities, security and investigation activities, public administration and defence, and labour services (such as domestic labour). All other sectors are open to 100% foreign-owned firms.

To streamline the process of applying for a licence to carry out business in the country, KDIPA is also in the process of setting up a one-stop shop for foreign companies interested in entering the domestic market. Under this programme, KDIPA will coordinate with all relevant government authorities to ensure that any application by a foreign-owned company to operate in Kuwait is dealt with in 15 days or less.

In another potentially big win for foreign investors, in early September 2014 the Ministry of Finance announced that Kuwait had suspended its offset programme, which had been in place since 1992. Offset programmes, which require foreign companies that win large government contracts to invest locally, are commonly used in the Gulf region. In Kuwait all military contracts valued at KD3m ($10.33m) or more, civil government contracts worth KD10m ($34.45m) or more, and various oil and gas contracts required bid winners to invest up to 35% of the contract value in a state-approved local venture, often in the areas of health care or education, for example.

Joint Funding

In late 2013 Kuwait’s government listed half of the shares of the Al Zour independent water and power plant on the Kuwait Stock Exchange. The shares, which were quickly snapped up, will become available when the plant is completed and becomes operational, which is currently expected in 2016. Sourcing financing for a major state-led infrastructure project like Al Zour from the public is novel in the context of Kuwait. Due to the success of the financing scheme, in late 2014 the government introduced Law No. 116 of 2014, which includes a variety of key alterations and upgrades to the nation’s PPP framework. Like the new FDI law, the new PPP legislation replaces an older law that was widely seen as restrictive, particularly for private sector partners involved in jointly financing state programmes and projects. In particular, the 2014 legislation takes a considerably clearer stance on the question of whether the government – in the form of the Partnerships Technical Bureau, which manages Kuwait’s PPP projects – or the private investor formally establishes a given project company.

Furthermore, the new law allows for a handful of advanced financing techniques, such as those used in the Al Zour project described above. Under Article 23 of Law No. 116 of 2014, a project company can pledge shares in the project (in an initial public offering, for example) well in advance of the project completion. Additionally, a PPP firm can mortgage the assets of the project itself to raise financing. Finally, under the new PPP law all decisions related to project tendering, project approval of detailed documents and the development of general policies in relation to a given project fall to a newly established Supreme Committee, which reports directly to the Ministry of Finance. The Supreme Committee is also meant to choose the government department to take the lead on a given PPP project, and to effectively represent the citizens of Kuwait in the terms of the PPP agreement. The government published the law’s executive regulations clarifying procurement matters in the official gazette in March 2015.

Outlook

Kuwait has lagged behind many of its peers in the region in a variety of key trade and investment indicators in recent years. In the World Bank’s 2015 “Doing Business” report, Kuwait ranked 86th in the world, down from 79th in 2014, and 117th in terms of the ease of importing and exporting goods. Additionally, FDI flows to Kuwait have been relatively limited in recent years in comparison to many of its regional neighbours, though according to data from the NBK’s economic research arm, since the 2007-08 financial downturn investment inflows into the Middle East as a whole have declined considerably as compared to the decade before the economic crisis.

While there are no simple fixes for these challenges, Kuwait’s government has taken major steps in recent years to address them head on. In 2013 the nation’s leaders set up a new, independent public authority to promote and facilitate FDI activity, which replaced the earlier FDI approval organisation. The new PPP law is also expected to have a positive impact in this area.

More broadly, the state has been working for more than a decade on schemes designed to diversify government revenues away from a reliance on hydrocarbons-related income. While the energy industry will likely continue to play an integral role in Kuwait’s economy for years to come, the government’s diversification efforts have resulted in increased activity across a range of key non-oil sectors, including construction and real estate and financial services, among others. With these efforts set to continue moving forward, and given the government’s recent push to streamline investment activities and trade, many local investors agree that the investment climate is brightening.

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