Buoyed by surging oil revenues, strong public finances, and a young and growing population, Kuwait is now moving toward a period of renewed growth after making a strong rebound from the global economic crisis. In 2011 the country’s GDP rose by an estimated 5.7%. According to projections from the International Monetary Fund (IMF), Kuwait will record an average GDP growth rate just over 5% between 2011 and 2015.

The country’s improving economic performance has come to the attention of the international community. In the “Global Competitiveness Report” (GCR) for 2011-12 published by the World Economic Forum, Kuwait jumped one spot over its previous ranking, placing 34th out of 139 nations. According to the report, Kuwait scored most highly in the areas of tax policy, national savings rates, government budget balance and the quality of investor protection. Due to these and other strengths, the country’s GCR score for its macroeconomic environment ranked second globally.

Moreover, in July 2011 Standard & Poor’s (S&P) raised Kuwait’s sovereign credit rating from AA- to AA on account of the country’s “high GDP per capita and strong external and fiscal balance sheet positions”. Fitch Ratings followed suit, affirming Kuwait’s AA rating while predicting further strengthening in the nation’s fiscal position “even if oil prices fall from their current high”. In addition, both S&P and Fitch noted how the government had avoided negative spill-over from the Arab Spring, partly because the country’s relatively open political system and subsidy policies had reduced the risk of domestic social unrest.

POLITICAL ECONOMY: As the only country in the GCC with an elected legislature, Kuwait has a unique culture of public participation which, by some measures, is growing more robust. Even so, critics argue that its liberal but somewhat confrontational political system has stymied national development. To overcome deadlock between parliamentarians and ministers, the Emir, Sheikh Sabah Al Ahmad Al Jaber Al Sabah, has dissolved parliament several times in the past five years, most recently in December 2011, citing “deteriorating conditions” amidst a political standoff between opposition members of parliament and the government. Further, the Kuwaiti cabinet has resigned seven times since the appointment of Prime Minister Sheikh Nasser Mohammed Al Ahmed Al Sabah in 2006.

This turnover has stalled key reforms and discouraged foreign investment. According to the World Bank, net foreign direct investment (FDI) inflows to Kuwait totalled $80.85m in 2010. By contrast, in that year the UAE and Saudi Arabia combined took over $25bn in FDI.

In addition, political infighting has led to the cancellation of major development contracts involving foreign firms. One notable example is the proposed joint venture between the Kuwait Oil Company (KOC) and the US-based Dow Chemical Company to create the world’s largest polyethylene manufacturer – a $17bn deal that was scrapped in December 2008 at the insistence of lawmakers, who balked at the investment cost.

NATIONAL DEVELOPMENT PLAN EFFECT: More recently, in its May 2011 progress report on Kuwait’s National Development Plan (NDP) — a long-term economic strategy launched in 2010 — Business Monitor International noted that many NDP projects throughout the country have stalled due to the “transitory and erratic nature of the political landscape”.

Yet, the passage and implementation of the NDP was in itself an historic achievement, one which illustrated that Kuwait’s rival political factions can indeed collaborate when necessary to advance the national interest. “Through the development plan, the country’s leadership has demonstrated both long-term vision and national unity,” said Duncan Hoyland, the head of trade and investment at the British embassy in Kuwait.

“Although political uncertainties remain a concern, there is a sense among ministers and lawmakers that the time has come for Kuwait to change course and begin to realise its vast economic potential.”

FIVE-YEAR PLANS: Culminating in 2035, the NDP includes five successive five-year plans that aim to diversify the economy beyond petroleum, revitalise the private sector, promote human capital development, and transform the country into a regional transport and business centre. Under the first five-year plan ( 2010-14), the government has called for approximately KD30bn ($108.2bn) in investment on infrastructure and development projects, with over half of this spending expected to come from investors. Such projects include capacity-building works on roads, ports and airports, an international-standard offshore tourism resort, massive residential developments, a metro and railway system linked to other GCC nations, and KD20bn ($72.1bn) in oil sector investments to boost production capacity. According to Adel Al Wugayan, secretary-general for the Supreme Council of Planning and Development, “More than 90% of our income comes from oil, and this needs to change in the long term to become a financial and trade hub regionally. We have a strategic location at the gate of Iraq and Iran and want to play a part in the logistics to these areas.”

Despite reports that some projects have been delayed by bureaucratic and political gridlock, as of April 2011 the government had allocated KD735m ($2.7bn) on the launch of 884 projects for the first NDP fiscal year (2010/11), according to figures from the Kuwait Financial Centre (Markaz). The vast majority of these projects were infrastructure-related, which reflects the view among NDP policymakers that infrastructure modernisation is an effective means to promote new areas of economic activity (see analysis). Hamad A Al Ameeri, the general manager of National Investments Company, told OBG, “Overall, the future outlook depends on increased public spending by the government during the next four years according to the development plan, which is necessary to stimulate the economy.”

RECENT LEGISLATION: Going forward, the NDP and the overall economy will benefit from recent legislation that has enhanced the business environment for workers and investors. In early 2010 several labour reforms were enacted giving more rights to private sector employees, including a minimum wage of KD60 ($216.30) per month, a maximum 48-hour work week and stronger guarantees for individuals retirement compensation. Primarily affecting foreign labourers, these measures will help the country to attract the workforce it needs to execute the major NDP projects planned over the next two decades.

Also in 2010, the Kuwaiti parliament approved legislation establishing the Capital Markets Authority (CMA), the nation’s first market regulator. A robust CMA will bring greater transparency and oversight to the bourse, which is the GCC’s second largest. In turn, this will boost confidence among foreign and institutional investors, helping Kuwait to become a leading financial centre in line with NDP objectives. According to Al Ameeri, “Currently, out of the investment companies listed on the Kuwait Stock Exchange, more than half are trading below their par value, which might result in mergers or liquidations forced by the new CMA.”

Perhaps the most noteworthy legislation to be enacted in 2010 was the privatisation bill, which passed despite stiff opposition from parliament. Under the law, state assets can now be privatised through a public shareholding company in which stakes are offered to Kuwaiti employees (5%), the government (20%), private investors (35%) and Kuwaiti nationals (40%) at an initial public offering. According to a variety of local reports, public holdings in telecoms, real estate, and utilities are currently under consideration.

In the future, each additional state privatisation will require approval from parliament, therefore public divestiture is not expected to happen quickly. Moreover, the law forbids privatisation in the oil industry, health care and education, and additionally allows the government to veto company decisions. According to critics, foreign and local investors may be unwilling to enter the market under these restrictions.

Yet, given that the privatisation bill was first proposed two decades ago, some regard its passage as a major political achievement for the country and a possible turning point for the Kuwaiti economy, which has long been dominated by state enterprises and the petroleum industry. In 2010 the public sector employed roughly 80% of Kuwaiti nationals, while oil income accounted for more than 90% of revenue – imbalances widely regarded as unsustainable. “The logic behind privatisation and the development plan is that Kuwait needs a more balanced economy where the private sector generates future growth and resources are deployed with greater efficiency,” said Hoyland.

PUBLIC-PRIVATE PARTNERSHIPS: One way in which the authorities plan to encourage private sector participation in the economy is through public-private partnerships (PPPs). Over the past few years, PPP projects have become a topic of great regional interest, with many GCC nations seeking private funding and expertise to address growing infrastructure demands.

As of December 2011, some 1638 projects, valued at approximately $968bn, are planned for the GCC region in the next decade. Many of these projects will likely be funded through PPPs, as well as FDI and joint ventures. Kuwait alone has earmarked around $133bn worth of projects for the next 10 years.

In Kuwait PPPs usually follow a build-operate-transfer (BOT) model, wherein a private firm builds and manages a facility for a fixed period before transferring ownership to the state. In recent decades this approach has been quite successful at launching major projects in Kuwait, especially in the areas of infrastructure, transport, real estate and power generation.

What is more, the country’s legal framework for BOT contracts has become more favourable to investors.

Under Law 7 of 2008, the BOT contract limit has been extended from 20 years to 30 years, with 40-year terms now available in special cases.

TEST CASE: Although most PPP projects are expected to follow a BOT model under the NDP, officials are now exploring new approaches. For example, in 2010 the government established the Kuwait Health Assurance Company (KHAC), a public-private enterprise that will begin providing mandatory health insurance to expatriates beginning in 2015 (see Insurance chapter).

According to official auction documents, the KHAC will be structured as a PPP in which the people of Kuwait, the government and private investors hold shares of 50%, 24% and 26%, respectively. The successful investor will be the company’s managing partner, and will oversee the construction and management of new private health centres nationwide.

According to some observers, if the KHAC succeeds it could usher in a new era for business in Kuwait in which investors and lawmakers will be far more enthusiastic about public-private cooperation. Further, as a headline NDP initiative, the KHAC has the potential to become an early confidence-boosting victory, potentially being a “champion project” with the capacity to win over current sceptics.

According to Adnan Sultan, the president of Al Qudra Consultancy, a Kuwait-based group that has advised on the NDP strategy, “The fate of the development plan will hinge on early success, or how quickly champion projects such as the KHAC emerge to assure both local and foreign investors that the scheme is viable.”

OIL & GAS: Although the government is encouraging private sector activity, the state-run petroleum industry will continue to dominate the economy for the foreseeable future. According to figures from the Ministry of Finance, Kuwait’s income from oil sales in the 2010/11 fiscal year reached approximately KD17.7bn ($63.5bn), a 44% increase on earlier estimates.

While the downside of relying on oil income is its volatility, as was illustrated during the financial crisis, when prices for Kuwaiti crude fell precipitously, the upside is clear as well. Due to the steady rise in global oil demand over the past decade, which saw the country’s crude exports rise in value from an average of $21 per barrel in 2001 to $82 per barrel in 2011, the Kuwaiti government has consistently run an impressive and growing account surplus (see analysis). Moreover, given estimates from the International Energy Agency that world oil demand will reach around 91m barrels per day (bpd) in 2012, up from the 89.5m bpd produced in 2011, it is likely that this surplus will continue to grow over the short to medium term, barring any major fluctuations in the global economy.

HYDROCARBONS INDUSTRY STRUCTURE: As the world’s fourth-largest oil exporter, Kuwait has an official daily production capacity of 3.1m bpd, a figure sector officials plan to increase to 3.5m bpd by 2015. The industry is wholly managed by the state-owned Kuwait Petroleum Corporation (KPC) and its subsidiaries, which include the KOC, Kuwait Petroleum International (KPI) and the Kuwait National Petroleum Company (KNPC).

Under Article 21 of the Kuwaiti constitution, the government is not permitted to sell rights to oil reserves or privatise production facilities, a prohibition that makes production-sharing with outside firms illegal. However, foreign companies are allowed to offer human resource training and consulting services, as well as bid on tenders for major engineering projects. In 2010, for example, the KOC awarded South Korea’s Hyundai Engineering and UK-based Petrofac project contracts worth KD520m ($1.9bn); under the agreement, Hyundai will build fuel and gas oil pipelines for KD404m ($1.5bn), while Petrofac will develop pipelines, metering systems and a pumping station for KD116m ($418.2m).

Increasing the potential for further such deals, in 2011 the KPC made headlines when it received approval from the Supreme Petroleum Council to begin downstream projects worth $30.5bn, including work on the long-awaited Al Zour refinery. Once completed in 2016, the $13.9bn refinery will have a capacity of 615,000 bpd, along with the ability to process much of the country’s high-density oil. By 2016 Kuwait plans to boost heavy oil production to 60,000 bpd.

In addition, the KPC has embarked on a joint venture in China, where it will partner with Sinopec to build an oil and petrochemicals refinery complex for $9bn in the southern city of Zhanjiang. Going forward, Kuwait also plans to increase crude exports to China. In December 2011, Kuwait provided 3.9% of China’s total imports, up from 2.6% in December 2010. The partnership is set to see Kuwait increase its exports to some 500,000 bpd, up from an average of 202,000 bpd reached in 2011.

NON-OIL SECTORS: The non-oil economy accounted for around 55% of GDP in 2009 (the last year for which figures have been released), up from an average contribution of 44% from 2006 to 2008, according to KAMCO statistics. The leading non-oil industry in 2009 was financial services, which accounted for some 25.5% of non-oil economic activities, a marked increase over its 15.4% share in 2004. This was followed by transportation, communications and storage, which combined for 15.2% of non-oil GDP in 2009, with manufacturing (including refining) making up the remaining 9.7%.

The private sector accounted for 37% of GDP in 2010, up from 28% in 2008. By the end of the NDP in 2014, the government plans to increase the private sector’s GDP contribution to 44%. This effort will be driven by the recently introduced privatisation, capital markets and labour laws, and by new agencies such as the Partnerships Technical Bureau (PTB), a body created in 2008 to promote PPP projects throughout the economy. In May 2011 the PTB organised a major summit in Kuwait City where experts representing several countries in the Middle East and North Africa (MENA) region shared expertise on PPP ventures and best practices.

PRIVATE SECTOR NEEDS: As the private sector’s share in the economy is gradually increasing, so too is the number of privately employed Kuwaitis. According to the National Bank of Kuwait, about 20% of Kuwaitis were employed in the private sector in 2011, up from 18% in 2008 and 16% in 2007. In part, this trend has been driven by the Manpower Law of 2000, which offers various protections to private sector workers such as legal guarantees of regular payments. Also, the law sets minimum quotas for hiring nationals according to the employer’s line of business, with fines handed down for non-compliance. Perhaps most importantly, the law offers privately employed locals the same social allowances that are given to state workers. In the 2010/11 fiscal year, government allowances to privately employed Kuwaitis totalled approximately KD290m ($1bn), according to local media reports.

Government largesse may discourage locals from seeking private sector jobs. In recent years, state employees in industries such as oil and education have seen their handsome salaries increased on several occasions. In just the first five months of 2011, for example, public sector pay hikes totalled KD700m ($2.5bn). This, according to critics, makes private employers uncompetitive, especially given that government work often requires shorter hours. On the other hand, supporters of government pay hikes argue that such measures reflect higher living costs. Indeed, over the past two years consumer inflation in Kuwait has ranged between 4% and 5% (see analysis), while home prices have risen markedly (see Real Estate chapter).

BUREAUCRACY: Another perceived obstacle to private sector growth is the business environment, which remains constrained by bureaucratic red tape. In the 2011 “Doing Business” report published by the World Bank, Kuwait ranked 74th among surveyed countries, behind other GCC members such as Oman (57), Qatar (50) and Saudi Arabia (11). Although Kuwait scored highly in the areas of tax policy and protecting investors, it fared poorly in other indices such as starting a business, enforcing contracts and issuing construction permits. To open a firm in Kuwait, for example, the report indicates that one must undergo 13 procedures that take an average of 35 days; in Saudi Arabia by comparison, one must undergo four procedures that take an average of five days.

Tareq Hussain Al Mazeedi, the chairman of Kuwait Small Projects Development Company, a venture capital firm for business start-ups, told OBG, “The best way to enhance the economy is to promote the development of the private sector, and this needs to start at the small and medium-sized enterprise (SME) level.”

COMPANIES: According to statistics from Global Investment House, net profits for Kuwaiti-listed companies announcing their results totalled approximately KD926.4m ($3.3bn) in the 2010 financial year, a marked increase of 80.9% over KD511m ($1.8bn) in 2009. In addition, the announced profits of foreign-listed firms on the Kuwait Stock Exchange were KD104m ($374.9m) in 2010, a 67.9% increase over the figure a year earlier. Overall, net profits for the market rose by 79.6% from 2009 to 2010, reaching KD1.03bn ($3.7bn).

In the 2010 financial year the worst performers in terms of profits were the investment and real estate sectors, which are still recovering from massive losses brought on by the global economic crisis. In the investment sector, which includes entities such as the Gulf Investment House and the National Investments Company, the 31 listed firms announcing results posted total losses of KD91m ($328.1m). This was an improvement over 2009, however, when losses totalled KD338m ($1.2bn). Meanwhile, in the real estate business, listed firms reported losses of KD63.3m ($228.2m), a deterioration from red ink of KD51m ($183.9m) in 2009.

Still, there is some optimism among market players given that the Kuwait Investment Authority (KIA) has announced plans to invest KD1bn ($3.6bn) in the commercial segment over the next five years (see Real Estate chapter). According to local reports, this will be used to purchase distressed properties, thus helping sector firms to minimise debts and improve liquidity.

BANKING: The best-performing industry in 2010 was the banking sector. Battered during the financial crisis due to falling asset values and the rise in non-performing loans, local banks have now stabilised and returned to profitability. In the 2010 financial year, nine listed Kuwaiti banks reported net profits of KD575.4m ($2.1bn), up 61.7% over KD355.8m ($1.3bn) in 2009. Further, share prices of local banks rose by over 40% in 2010, largely on the expectation that domestic lending institutions will play a major role in financing construction and development projects under the NDP.

Moreover, the sector has received positive assessments from independent researchers and ratings agencies. In July 2010, the IMF conducted a “stress test” of banks, concluding that the “banking system could broadly withstand significant shocks given its comfortable capital and liquidity buffers”. In July 2011 Fitch Ratings gave the sector a stable outlook, noting that lenders had markedly reduced their asset impairment charges.

Yet, domestic banks have become more cautious since the crisis, which means the financing environment has become more restrictive. According to data from the central bank, private sector loans and bank bond investments grew just 1.9% in 2010, and a mere 0.3% during the first six months of 2011. This slowdown in lending may prevent local private developers from executing capital-intensive NDP projects in the future.

CONSUMERS: As credit lines have tightened, it has become more difficult for consumers to make large purchases. This is especially true in the housing market, where property values are rising and mortgage approvals are falling. In April 2011, for example, housing loans from the Savings and Credit Bank (SCB) totalled KD6.3m ($22.7m) – the lowest figure in more than 10 years. In addition, the monthly value of SCB housing loans averaged KD7.8m ($28.1m) in 2010, down 42% from a monthly average of KD13.5m ($48.7m) in 2009.

Still, local purchasing power is high for three reasons. First, after growing 11.8% in 2008 and 6.7% in 2009, Kuwaiti household income grew another 5.7% in 2010, in large part due to public sector salary increases. Second, in June 2010 the national unemployment rate fell to 3.1%, the lowest in the country’s history. Third, Kuwait’s GDP per capita was estimated at $48,900 in 2010 – a figure expected to reach $59,335 by 2015, according to projections from Business Monitor International.

OUTLOOK: Kuwait’s continued economic progress depends on developing the private sector and diversifying the economy beyond petroleum. This is understood by the government, which has slated 80% of NDP projects for non-hydrocarbons industries. “There are so many options for the spending of the NDP, but we must find where we can build a competitive advantage,” said Al Wugayan. During this period, the government hopes to reach an annual private sector growth rate of 8.8%. By comparison, the public sector is expected to grow at an average annual rate of 2.4%.

Kuwait has a young demographic profile, with 45% of the population under the age of 25, and is likely to see an influx of foreign workers as major NDP construction projects are initiated. Thus, the outlook for private consumption is positive, with some analysts predicting an average annual consumption growth rate of 5.3% from 2011 to 2015. Second, population growth will lead to rising infrastructure demand, compelling government planners to expand transportation networks, schools, residential areas and hospitals.

Of course, over the short to medium term, the country’s fortunes will remain inextricably tied to the price of oil. Given the rising demand for oil worldwide, this is not a major cause for concern. Indeed, oil revenues have put the country in an enviable fiscal position, with the government recording its 12th consecutive budget surplus in 2010/11, at KD9.7bn ($26.53bn).

Even so, the country faces a number of challenges in the coming years, not least of which is recurrent stand-offs between the Kuwaiti parliament and cabinet. Going forward, another question mark is whether Kuwait has the capacity, technical expertise and private bank financing needed to carry out NDP projects throughout the economy. Still, the government’s willingness to bring about long-overdue reforms and development works under the NDP is an auspicious sign, both for investors and the nation’s overall growth prospects.