The Report: Kuwait 2015

Economy

Although the recent dip in oil prices is undoubtedly a concern for Kuwait’s economy should prices remain depressed, the successive budget surpluses of recent years and the country’s low breakeven price on oil production mean the country is strongly placed to cope with lower prices without increasing production. Meanwhile, the government remains committed to maintaining capital expenditures and delivering the project pipeline outlined under the National Development Plan 2015-20, and foreign direct investment continues to grow as the government works to encourage foreign involvement in the local economy in a bid to diversify sources of investment. A number of positive policy reforms aimed at diversifying industry and strengthening private sector participation are likely to continue to support steady growth going forward.

This chapter contains interviews with Tariq Abdulsalam, CEO - Investments, Kuwait Projects Company; and Chairman, United Real Estate; Meshaal Jaber Al Ahmad Al Sabah, Director-General, Kuwait Direct Investment Promotion Authority; and Abdulwahab Al Bader, Director-General, Kuwait Fund for Arab Economic Development.

Banking

Kuwait’s banking system has improved markedly in the years since the global economic downturn: at the end of 2014, total customer and government deposits held by local banks stood at $129.6bn, up from $125.5bn at the end of 2013. Meanwhile, a series of new rules put in place by the Central Bank of Kuwait and other regulatory bodies in recent years have steadied the sector, providing a stable framework for future expansion. As of September 2014 the capital adequacy ratio in Kuwait’s banking industry was 18.3%, up from 15.6% at the end of 2008 and well above the 12% minimum. Kuwait’s sovereign net foreign assets, meanwhile, were valued at 269% of GDP at the end of the 2014 – the highest of any rated sovereign, according to Fitch – and government debt was at just 5.3% of GDP, an indication of Kuwait’s strong fiscal position.

This chapter contains an interview with Mohammad Y Al Hashel, Governor, Central Bank of Kuwait.

Trade & Investment

In recent years Kuwait has seen steadily expanding trade activity with neighbouring countries, the broader Middle East and a variety of key partners further afield. Dependence on oil income is one of the nation’s chief challenges: while the country has continued to diversify its economy away from hydrocarbons revenues, oil and other mineral fuels remain the country’s most important export products, accounting for 88.8% of total exports in the first quarter of 2015. Meanwhile, the government’s Foreign Direct Investment (FDI) Law, introduced in June 2013, is expected to boost FDI in coming years, as are alterations to the public-private partnership framework introduced in 2014.

This chapter contains an interview with Yoon Sang-Jick, Korean Minister of Trade, Industry and Energy.

Capital Markets

A series of reforms being implemented by the Capital Markets Authority are expected to benefit the country’s bourse, following on the comprehensive restructuring of the Kuwait Stock Exchange in the years following the 2007-08 economic downturn. In 2009 the Kuwait Stock Exchange introduced a new classification system that organised listed companies into 15 sectors, instead of just eight as under the previous system. The regulator is also moving forward with a plan to privatise the Kuwait Stock Exchange, which was converted to a privately managed company called Bourse Kuwait in April 2015, and eventually to take the bourse public in an IPO. The banking sector currently accounts for 49% of the total Kuwait Stock Exchange value by market capitalisation, followed by telecoms with 11%.

Islamic Financial Services

Over the past decade Kuwait has worked to shore up its longstanding reputation as a centre for Islamic financial services, leading to the rapid expansion of sharia-compliant banks and investment companies in recent years. Islamic banking assets, at just over 20% of the total in 2005, grew to around 45% by the end of 2013, and an IMF report released in December 2014 showed Kuwait’s sharia-compliant banking sector is the fifth largest in the world, with more than $68.9bn in assets. Moving forward, the bond market appears poised for a resurgence, with a variety of private and state-owned firms recently announcing plans to issue sukuk, or sharia-compliant bonds. The government has also been preparing to introduce a new, independent insurance regulator since 2012, with draft legislation reportedly including a separate set of rules and regulations for providers of takaful, or Islamic insurance.

Insurance

Kuwait’s insurance sector has posted solid expansion in recent years on the back of growth in a handful of key areas including takaful (Islamic insurance) and other non-life segments, with the industry as a whole bringing in $1.04bn in gross written premiums (GWPs) in 2014. The industry is a crowded one in Kuwait, with the top five insurers controlling around 60% of revenues at the end of 2013. The takaful segment has been active in the country since the early 1990s, and the most recent figures show that Kuwait’s 11 Islamic insurers brought in 18.7% of total GWPs in 2012. Meanwhile, the new health care system includes plans to cover expatriates, which accounted for an estimated 69% of the population as of the end of 2014.

Transport & Logistics

Proximity to major regional markets, which have a combined population of 140m and $1.3trn in output, is a major advantage to Kuwait’s transport and logistics sector. The government has outlined a number of infrastructure projects and upgrades to be implemented as part of Kuwait Development Plan, with enhancements to sea and air links a major priority for the state. The country’s international airport has already seen dramatic growth in recent years, with the number of passengers that travel through it jumping from 4.76m in 2004 to 9.38m in 2013, while a new $1.2bn port facility in Boubyan is expected to serve as Kuwait’s major sea link, with 24 berths and an annual capacity of 1.8m containers.

Energy

Kuwait’s position as one of the biggest players in the international energy markets is backed by its proven reserves, currently the sixth-largest in the world. While international oil prices will have a significant impact on state revenues moving forward, low production costs and ample fiscal reserves should shield the country from the price downturn. The country increased its oil production by more than 14% between 2007 and 2014, from an estimated 2.57m bpd to 2.93m bpd, according to OPEC. Moving forward, the government has outlined plans to develop critical infrastructure projects and a number of major oil developments for a total five-year investment of more than $116bn, with spending in the oil and gas sector to top $100bn. In the non-oil segment, the Kuwait Institute for Scientific Research is investigating the potential for alternative energy sources and has recently launched three projects with a combined capacity of 70 MW.

This chapter contains interviews with Hashem Sayed Hashem, CEO, Kuwait Oil Company; and Anas Meerza, Group CEO, National Technology Enterprises Company.

Construction & Real Estate

The Kuwaiti construction market saw a marked rebound in 2014, with the government moving forward with key developments in a number of sectors. The Public Authority for Housing and Welfare has a mandate to provide housing for 2.6m people by 2030. The country’s oil and gas sector was a major contributor to the country’s resurgence in construction projects, with oil and gas projects representing more than 60% of the $25.1bn awarded in 2014. Rising investment in real estate, meanwhile, is bolstering that sector, with the total value of transactions in 2014 increasing by nearly 40% on 2013 to reach $7.27bn.

This chapter contains an interview with Khaled Al Mashaan, Vice-Chairman and CEO, Alargan.

Telecoms & IT

Access to the internet, especially via mobile devices, has accelerated rapidly in Kuwait since the government liberalised the telecoms and IT sector in the early 2000s. The nation now has one of the highest smartphone penetration rates in the region, at 69% of the population in 2014 after seeing 40% growth on the previous year. As one of the first GCC nations to embrace competition by allowing private sector participation in the provision of telecoms services, Kuwait has lately moved to extend oversight of private operations, approving a bill in April 2014 to create an independent telecoms regulator, a move expected to yield fresh momentum for the industry going forward. Meanwhile, despite new challenges in cybersecurity, there is optimism in the industry surrounding the opportunities for new businesses to help protect against cyberthreats.

Industry

A programme to boost oil production in Kuwait has stimulated growth in construction and petrochemicals. After hydrocarbons extraction and refining, the petrochemicals industry is the largest in Kuwait, with the bulk of production exported to Asia. Manufacturing, meanwhile, is set for continued growth as the country makes a greater push to diversify its industrial base – efforts that will be boosted by a significant influx of funds allocated to transport upgrades as part of the National Development Plan 2015-20. Local pharmaceutical companies are also poised to benefit from rising demand for health care services in the coming years, driven by high birth rates, an ageing population and sustained immigration.

This chapter contains an interview with Ahmad Al Jemaz, CEO, Kuwait Aromatics Company.

Retail

With GDP per capita among the highest in the world at $43,200, Kuwait is seeing its retail market continue to perform robustly, underpinned by a strong appetite for luxury products and the strong purchasing power of a young and diverse population. The value of wholesale and retail trade in Kuwait grew 22% between 2010 and 2013, reaching a value of $5.65bn. Meanwhile, the local retail market is forecast to expand at a compound annual growth rate (CAGR) of 6.7% between 2013 and 2018. While traditional retailers remain popular, sales at Kuwaiti supermarkets and hypermarkets are forecast to expand at a CAGR of 9.6% between 2013 and 2018.

Health

Kuwait’s rapidly changing demographic profile and increased prosperity have given rise to various lifestyle changes that have fuelled a rise in the prevalence of non-communicable diseases. To counter this, and to free up public resources for healthy living initiatives, the government is encouraging greater private sector involvement in the sector, starting with provision of health care for expatriates. Meanwhile, the Ministry of Health is in the process of upgrading nine hospitals at a total estimated cost of KD1.25bn ($4.31bn). Two projects – the Al Razi Hospital and the Amiri Hospital – are already under construction, and seven others are to break ground in the next few years.

Education

During the 2013/14 academic year, the government operated a total of 803 public schools, with a total enrolment of 360,845 pupils and a teaching staff of 60,902. As demand grows, reforms designed to underpin the sector’s role in the government’s economic diversification plan are being implemented in line with Kuwait Vision 2035, the country’s long-term development strategy. A greater focus on research and development will be needed over the long term as part of the broader push towards a knowledge-based economy. An ongoing focus on female education has led to low levels of unemployment among women aged 15-24, which in 2013 stood at 12.7% versus 22.8% for males. In the private sector, the number of schools has risen from 453 in 2005/06 to 501 in 2013/14, with enrolment rising above 250,000.

Legal Framework

This chapter contains an overview of the legal framework for local and international investors in Kuwait and provides a rundown of the key improvements that have been made to the business environment. These include recently introduced public-private partnership laws and a new state agency set up to promote foreign direct investment.

The Guide

The Guide contains listings of some of the leading hotels and resorts in Kuwait, contacts for important government offices and services, and useful information for first-time visitors.

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