Kuwait looks to build on firm foundations

Kuwait’s abundance of natural resources is a source of envy around the globe. The country has proven oil reserves of 102 billion barrels, which would last for 90 years at the current rate of production, according to the International Monetary Fund (IMF). But as with any country so heavily dependent on one source of income, the black gold that sits underneath the country can provide challenging economic problems for the country’s rulers.

The IMF expects the economic outlook in Kuwait to improve in 2014 and to continue in this direction over the medium term. It expects non-oil growth to increase to 4.4% in 2014, with fiscal and current account surpluses remaining large. And overall growth is expected to be supported by a moderate increase in oil production, it said.

“The economy is stable,” says Ahmed Zulficar, deputy CEO of Kuwaiti lender Ahli United Bank. “The price of oil is stable but could be affected in the future. I don’t see much effect in 2014 because still there is a surplus in the budget. It depends on how far the budget surplus will continue in the future. I believe that the government is working to improve other sources of income from non-oil sectors.

“For the time being, Kuwait is exporting the oil as crude oil, but there could be several industries that are built on this oil. Also, the government has investments outside of Kuwait.”

Positive outlook

According to ratings agency Moody's, Kuwait’s hydrocarbon sector, predominantly oil, accounts for 60% of the country's gross domestic product, and oil production was broadly stable at 2.98 million barrels a day on average in 2012-13, close to capacity.

“Kuwait’s average export oil price has been rising to about $107 per barrel in 2013 from $61.5 in 2009 and is far beyond estimated break-even prices for fiscal and external current accounts,” says Moody's sovereign analyst Steffen Dyck. “Kuwait has the lowest fiscal break-even oil price within the Gulf Co-operation Council [GCC], estimated to be about $50 per barrel in 2014 and 2015.”

The positive economic growth outlook has been mirrored by the improving statistics on foreign direct investment (FDI) since the onset of the global financial crisis. According to Mr Dyck, FDI flows into Kuwait have picked up, amounting to $1.8bn in 2012. The country then pulled in the same sum in the first three quarters of 2013 alone. 

“This compares to an average of only $400m per year between 2005 and 2011,” adds Mr Dyck. “Net FDI inflows remain negative, however, because Kuwait is investing much higher amounts abroad; about $7.5bn in 2012 and $6.4bn during the first three quarters of 2013.”

Kick-starting the NDP

The business community in Kuwait is pinning a lot of hope on signs that the implementation of the country’s National Development Plan (NDP) will start to pick up speed after a long delay. The plan could mean significant profits for a variety of companies across the country and improve the quality of life of many Kuwaitis. The NDP reportedly contains plans for several hundred projects across a variety of industries and could significantly transform Kuwait’s economy and boost its infrastructure base across the board.

“We [are looking] for growth from the National Development Plan,” says Mr Zulficar. “The plan has been there for a period of time and it has not been as progressive as we would expect. But I hope that 2014-15 will be better than previous years. The new government [is] working hard to improve. There is a strong will.”

Mr Zulficar’s sentiments are echoed up by new National Bank of Kuwait group CEO Isam Al-Sager, who recently replaced the long-standing Ibrahim Dabdoub at the summit of the lender. Mr Al-Sager says banks are well positioned to meet loan demand growth, with the improving pace of economic growth expected to have the largest impact on the banking industry this year.

“The critical factor in this regard is the pace of government investment projects that we see beginning to happen,” says Mr Al-Sager. “A number of large projects have been finally signed and will begin in earnest, or accelerate, this year.”

Mr Al-Sager mentions specifically the Al-Zour North power plant, about $12bn-worth of clean-fuel refineries and a number of hospitals as examples. “And of course, this is supported by Kuwait’s tremendous fiscal position. This fiscal year will see Kuwait’s 14th consecutive budget surplus,” he adds.

Quickening pace of development

Ozgur Kutay, the CEO of Citi Kuwait, believes that progress has been slow in recent years but there have been more tangible steps taken in 2014, mainly in the power and oil industries.

“This momentum is expected to expand into infrastructure and healthcare areas in the coming months,” he says. “Some of those projects will be financed by the banks or international capital markets and this will trigger new foreign capital and labour to come to Kuwait, which will also indirectly increase the opportunities for the banks… We believe the required amount of financing to reach the ambitious development plan targets is quite large and it requires the rapid development of local capital markets.”

The NDP could indeed spark a rush by Kuwaiti companies to tap funds internationally in order to cope with the financing of such large and important projects, a move that could benefit both local banks and international players in the market.

“The opportunity is sufficiently complex and will require Kuwaiti issuers to reach the global capital markets for the internationally bankable projects,” says Mr Kutay. “This requires careful planning and the involvement of global players such as Citi, and we are ready to seize this opportunity to assist Kuwait to reach its aspiring goals.”

The delays for the NDP were widely acknowledged to be down to political infighting within the Kuwaiti parliament, causing long delays over a number of years as the politicians argued among themselves and prevented plans from going ahead in the process.

But the acting CEO of the Commercial Bank of Kuwait, Elham Mahfouz, says that there is a calmer atmosphere within the country’s new parliament. “I can’t say it’s perfect, but there is a kind of a harmony,” she says. “Some of the projects we have seen delayed have already been given the direction to go ahead.” And in addition to interest from abroad for projects in the NDP, investors in the capital markets are also showing renewed interest in Kuwait, according to Ms Mahfouz.

Demographic challenges

Demographics are another key factor affecting the Kuwaiti economy and can have a major impact on key trends emerging in the future. According to the IMF, of the 3.8 million people living in Kuwait, only 32% are Kuwaitis. A further breakdown of the data shows that about 95% of private sector employees are non-Kuwaitis, while 70% of government employees are Kuwaitis.

The IMF says: “The current labour market structure is not providing incentives for Kuwaitis to work in the private sector. Currently, there is a large wage differential between public and private sector jobs, which creates a disincentive to work in the private sector.

“While existing subsidies for Kuwaitis working in the private sector, in the form of permanent allowances offered to all nationals in the private sector, partly alleviate the wage differential, frequent increases in government wages, such as the 25% increase in 2012, erode the subsidy. Job security and higher benefits, including less hours of work, will continue to attract Kuwaitis to the public sector.”

The dinar basket

The Kuwaiti dinar has been slightly weakening against the US dollar over the past two years when viewing annual averages, according to Mr Dyck at Moody's. It has moved between 0.265 dinars to the dollar and 0.291 dinars to the dollar since 2008. “Given the country’s huge external surpluses, this seems to be more an effect of US dollar strengthening, rather than reflecting underlying weaknesses in the Kuwaiti economy,” says Mr Dyck.

A source within one of Kuwait’s larger banks told The Banker that the country has a basket currency, unlike most of the GCC currencies, which have a peg to the US dollar. “Because of that basket, it does mean that the central bank is much more proactive in how it manages that basket,” he says. “It is able to position itself through pretty detailed analysis to defend Kuwait’s foreign exchange income.”

“The structure of the basket is not revealed, however, we have reason to believe that it is, and consistent with, energy exports, which are principally paid for in dollars. The basket is heavily weighted to the dollar. We have seen some fluctuations in the value of the dollar over the past month as a result of the perceived recovery in the US. We have seen some relative strength indicated. Whether that will be sustainable or not remains to be seen. It will help ultimately to lower inflation in Kuwait, which is good for consumers, and again, consistent with their mandate.

“The central bank does an excellent job. It’s given a very clear mandate by the government and it exists to ensure the stability and growth of this economy. To that end, it has put in a series of rules and regulations that are appropriate to that.” 

The road ahead

These strong fundamentals all seem to have put Kuwait on a sure footing for the time being. The price of oil has been going in the right direction for Kuwait over the past few years and appears to be holding, and the NDP is finally showing signs of progressing following a long period of frustration as politicians stalled and kept vital projects from getting under way. Challenges remain, however, in the sharp divides between the country’s public and private sectors and the weakening of the currency also creates some concerns.

Kuwait’s short- and medium-term economic successes are likely to be more intertwined with the price of oil than any other major factor. But as the country moves forwards, the ability of the government to diversify as much as possible away from oil and create a sustainable and thriving non-oil economy will come more and more under the spotlight.