The Report: Kuwait 2012

Politics

Kuwait is widely regarded as a leader of Arab democracy within the Gulf region and a forerunner of political reform in a conservative neighbourhood. Recent years have seen a great deal of progress: in 2005 a law was passed giving women the right to vote and run in elections for the national assembly. Political participation is high, with the 2009 elections seeing a voter turnout of around 60%. Important political, social and economic issues remain unresolved, however. Kuwait is still divided on the issue of gender segregation in universities, for example. Relations with northern neighbour Iran have been far from straightforward, and opposition groups have hampered a new National Development Plan. This chapter includes interviews with Emir Sheikh Sabah Al Ahmed Al Jaber Al Sabah; Italian Foreign Minister Giulio Terzi di Sant’Agata; and Lim Hng Kiang, Minister of Trade and Industry for Singapore.

Economy

Kuwait’s economy is famously based on its natural resources, including 8.2% of the world’s oil reserves and around 1% of global gas reserves. The economy is therefore inextricably linked to the price of oil and will remain so for the medium term at least. However, in recent times oil revenues have surged, and together with strong public finances and a young and growing population, the country’s GDP rose 5.7% in 2011. The non-oil economy accounted for 55% of GDP in 2009, a figure the government seeks to increase to reduce dependence on hydrocarbons. Going forward, another key government target is the growth of the private sector’s contribution to the economy, with some $133bn worth of infrastructure projects over the next decade – as part of the National Development Plan (NDP) – to be implemented by public-private schemes. Moreover, 80% of NDP projects are slated for non-hydrocarbons industries. This chapter includes interviews with Minister of Finance Mustafa Al Shamali; Abdalla Salem El Badri, Secretary-General, OPEC; Faisal Hamad Al Ayyar, Vice-Chairman, Kuwait Projects Company (KIPCO); and Moritz Kraemer, Managing Director and Head of EMEA Sovereign Ratings, Standard & Poor’s.

Banking

The banking sector continues to follow conservative lending policies as it returns to pre-downturn strength. Thanks to the adroit response of both the government and the central bank, however, the sector is emerging from a challenging period, ready to grow with the wider economy once again. Indeed, limited competition from foreign banks has helped establish Kuwait’s domestic banking system as one of the most robust in the MENA region. The government’s 2010-14 plan is aimed at reviving the economy and overcoming recessionary pressures. The Financial Stability Law, ratified in May 2009, aims to shore up banks, productive sectors and investment companies, and the Central Bank of Kuwait is taking wide-ranging action to help revive banks’ willingness to lend.

Capital Markets

The Kuwait Stock Exchange (KSE) is one of the oldest in the region and traditionally has been a regional leader in sovereign bond issuance. Following the economic downturn that started in 2008, the KSE has sought to restore confidence and offer a route to renewed growth via a comprehensive package of reforms. The Capital Markets Law, passed in 2010, aims to boost transparency and enhance investor knowledge regarding participation on the bourse. While these measures may depress trading in the short term, better regulation will provide the basis for long-term expansion. This chapter includes an interview with Ziad Hasan Al Qaissi, Executive Vice-President, Investment Advisory and Research Division, KAMCO. It also features a roundtable with Hisham A Al Razzuqi, CEO, Gulf Investment Corporation; Ali Ahmed Al Zubaid, Deputy Chairman and MD, Alimtiaz Investment; and Maha K Al Ghunaim, Chairperson and MD, Global Investment House.

Islamic financial services

Sharia-compliant banking represents a large and vibrant market segment in Kuwait, as Islamic banks exhibit a similar profitability trend to their conventional counterparts. Within Kuwait, Islamic banks hold 35% of total banking assets, and it has been estimated that they are growing at a rate of 20% per annum. On the other hand, the 2008 financial crisis brought the sharia-compliant segment slow or stagnant expansion and, in some cases, contraction. This has highlighted the need for a comprehensive regulatory structure to complement the legal framework and the implementation of a new layer of regulations. The government is poised to address this need with new sukuk (sharia-compliant bonds) and trust laws, designed to establish a robust governance framework for sukuk issuance. This chapter includes interviews with Mohammad S Al Omar, CEO, Kuwait Finance House; and Mohammed Jarrah Al Sabah, Chairman, Kuwait International Bank.

Insurance

The sector is entering a period of transition following its recovery from the global economic downturn. Although penetration rates are low, rapid population growth, rising per capita income levels and regulatory developments like the 2010 privatisation law are driving up demand for insurance products in Kuwait. A number of takaful (sharia-compliant) insurers are successfully emerging, tapping into a market that has traditionally been inaccessible to conventional providers. Insurers are also looking for ways to take advantage of the government’s economic stimulus packages, set to be implemented over the next few years. It has been estimated that government spending alone could produce a 10-20% growth in premium income over the next several years. At the same time, the Kuwait Health Assurance Company is set to make health care mandatory for expatriates in an effort to reduce costs, promote new forms of care and increase privatisation.

Energy

With oil still very much the backbone of its economy, Kuwait is looking to expand production. State-owned Kuwait Petroleum Corporation (KPC) has approved $90bn worth of spending on the oil and gas industry up to 2015. Indeed, gas has sizeable potential, since Kuwait currently produces less than 1% of its proven reserves of natural gas. Increasing this amount will translate into both financial and environmental benefits, reducing dependence on more costly liquid fuels. Diversification is another key domestic policy; plans have been announced to build four 1000-MW nuclear reactors by 2022, and Kuwait has signed cooperation agreements with a number of countries. Solar power is also being examined to increase electricity generation capacity, both as part of Kuwait’s diversification strategy and to meet rapidly rising demand for electricity. This chapter includes an interview with Farouk Al Zanki, CEO, KPC.

Construction & Real Estate

As in many other countries, the construction industry in Kuwait was one of the first-hit areas of the economy during the global recession. However, because of this, the sector is set to benefit from hundreds of billions of dollars in infrastructure spending to be spent over the next 20-25 years as part of Vision 2035. This investment will be staggered over a series of five-year plans, the first of which being the National Development Plan (NDP), which will run until 2014. Key to the NDP will be the development of several transport projects that will improve the efficiency of commuter and construction networks. In addition, a number of human development projects are in the works, with several universities, medical facilities and hospitals set to be built in the coming years. Residential construction is also a key aspect of the plans, and to help meet growing housing demand, the government is planning six new residential cities across the country with a total of 70,000 units. The government sees liquidity injection and private-sector participation as key means of achieving these ambitious targets.

Telecoms and IT

Ever since Kuwait opened its mobile market to further competition by granting a licence to a third mobile operator, Viva, in 2008, competition has ratcheted up. However, while the number of mobile subscribers has also increased, from 4.09m in first-quarter 2010, to 4.59m registered users in 2011, operator revenues have declined. With tightening margins, mobile internet and value-added services have become the primary battleground in the fight for revenues. Blackberry, iPhone and iPad promotions, for example, are now targeted at the youth and high-income segments of the population. Internet penetration rates have increased, yet at just 39%, the coming years should see many opportunities for entrepreneurs to deliver specialised online content to Kuwaitis. However, the government wishes to ensure that internet service providers bring prices down over time as the market develops, and is considering the introduction of a sector regulator.

Transport & Logistics

A number of major developments are underway in the transport sector following the massive spending plan approved by the Kuwaiti government in 2010. Projects include the expansion at Kuwait International Airport, with a new terminal set to raise passenger capacity from 7.2m to 20m upon completion in 2017. Plans to develop a metro system are now at the feasibility stage. While defence and government services are set to decline with the withdrawal of US troops from Iraq, the energy industry has become the greatest source of demand for logistics in the country. A new port project at Boubyan brings the possibility of construction and development projects in post-war Iraq.

Industry

While the contribution of oil to the economy has fallen in recent years, due in part to the global downturn, hydrocarbons still make up nearly half of Kuwait’s GDP and provide the government with around 95% of its annual revenue. Indeed, under the New Development Plan, launched in 2010, oil production is set to rise. However, like all Gulf economies, Kuwait has adopted a long-term strategy of economic diversification to reduce its dependence on hydrocarbons. As part of its Vision 2035 goals, Kuwait seeks to transform itself into a regional and financial centre. Under this scheme, both upstream and downstream segments are undergoing a process of expansion guided by a national five-year plan that also calls for investment in the nascent non-oil industrial sector. Small and medium-sized enterprises (SMEs) are seen as key drivers of this future growth, with 84% of firms in the non-oil sector being SMEs. Manufacturing is also being expanded to reduce reliance on the oil sector, with a wide range of large projects and infrastructural upgrades in the pipeline.

Health and Education

Free health care is widely regarded as a civic privilege in Kuwait. However, a growing population means that health care provision is starting to strain state finances. A new scheme is therefore underway to encourage private-sector participation to reduce the burden of state care. The Kuwait Health Assurance Company (KHAC) will be launched by 2015, with a mandate to manage the health care needs of all expatriates living in Kuwait (the number of whom is estimated to rise to 2.23m by 2024). Other new schemes, such as the National Development plan and Mobile Health, aim to expand the health sector and provide improved access to – and provision of – health care. In education, the government plans to upgrade public schools, training institutes and universities, both in terms of facilities and curricula. The Ministry of Education, under the Vision 2030 strategy, also plans to build up to 182 schools. This chapter includes an interview with Dr Kazem Behbehani, Director-General, Dasman Diabetes Institute and former Assistant Director-General, World Health Organisation.

Retail

In the world of retail, Kuwait is a heavy-hitter. This is despite a relatively small population of some 3.5m. Indeed, with the high level of disposable income that Kuwaitis enjoy, retail sales are expected to grow over the coming years by some 42%, from $8.41bn in 2011 to $11.92bn by 2015. This is because mall shopping has become ingrained in local popular culture. Moreover, in recent years a range of new shopping developments have driven up the level of competition. The food and beverage segment continues to be a key component of the retail market, contributing $2.54bn in sales for 2010, accounting for a 33.9% share of the overall sector, despite inflation and the rising cost of food.

Tax

This chapter contains details about Kuwait’s tax system, including rules and regulations for foreign investment, procedures for tax filing and appeals, double-tax avoidance treaty agreements and information on trade licences and sponsorship of foreign firms. This chapter also includes an interview with Qais Al Nisf, Managing Partner, BDO.

Legal Framework

Over the past three years Kuwait has promulgated a number of laws concerning public-private partnerships (PPPs), an area which holds great potential in the country. However, since most of the PPP projects initiated by the state are still in their initial phases, it remains to be seen whether there is credence to the proposed Kuwait approach. This chapter looks at the project company structures proposed by the PPP Law and related financing considerations.

The Guide

Table of Contents

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