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WorldApril 2 2013

New government incites new-found optimism in Kuwait

In the past year, political turbulence has dented Kuwait's otherwise healthy economy, with political infighting effectively blocking the government's $130bn economic development plan (EDP). But a new government, elected in December 2012, looks set to put an end to the country's political problems and kick-start the EDP.
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New government incites new-found optimism in Kuwait

The phrase you hear most in Kuwait these days is, “it takes time”. Unlike a year ago, when the stalemate between the country's government and parliament meant that the most common words being bandied about were “blockages”, “delays” and “stagnation”, recent months have witnessed a transformation of attitudes, a new-found optimism and a more positive environment in which the political paralysis that has dogged the economy in recent years appears to be, slowly but surely, retreating.

Has Kuwait turned a corner; has one of the world’s biggest oil producers put its domestic problems behind it? It is perhaps too early to tell, but a number of indicators suggest that the new-found optimism is justified.

Back and forth

On the face of it, Kuwait is in an ideal economic position. The country has a relatively small population – estimated at 2.65 million in July 2012 – an estimated 9% of global crude oil reserves and in 2012, its oil production averaged 2.8 million barrels per day (bpd) in the first 11 months of the year, up from 2.5 million bpd in 2011. With oil accounting for nearly 50% of gross domestic product (GDP) and growth estimated at 5.2% in 2012 – below the 8.2% in 2011 but well above the average 3.2% recorded between 2007 and 2011 – Kuwait is well placed by current international standards.

Furthermore, forecasts by the National Bank of Kuwait (NBK) suggest an increasing fiscal surplus in 2013 of Kd14bn ($49bn), which would represent Kuwait’s 14th consecutive budget surplus. But, these figures disguise the fact that ongoing political stalemate has weighed heavily on the economy in recent months.

Kuwait has seen 10 different governments since 2006, thanks to a long-running row between the elected government and parliament. In 2010, the government announced a $130bn economic development plan (EDP) – involving many large infrastructure projects – that was designed to provide a major boost to the economy. But its implementation has been difficult, as projects have been stalled by parliament.

Making progress

In February 2012, elections resulted in a parliament with a majority that was opposed to government policies. Consequently, during 2012, political machinations led to stalemate on the progress of the EDP, with a number of critical outbursts.

NBK group CEO Ibrahim Dabdoub says: “2012 was a difficult year for the banking sector in Kuwait as the operating environment remained stagnant. Government spending was insufficient and the tendering of new projects remained behind schedule, leading to slower economic activity and an underperforming stock market.” NBK reported net profit of $1.09bn for 2012, up 1% from $1.08bn in 2011.

In October 2012, Kuwait's parliament was dissolved again and a new one was elected on December 1, 2012, amid mass rallies and boycotts. The appointment of a new parliament, which was preceded by a major speech by the Emir, Sheikh Sabah Al-Ahmed Al-Sabah, in which he critised the deadlock, seemed to mark a turning point for the country.

Kuwait's current parliament appears to be less obstructive and more willing to support the government’s initiatives and, while bankers and officials are reluctant to state that Kuwait has fully turned the corner, there is increasing optimism amid signs that the project pipeline is starting to move and government spending is beginning to be unlocked.

New rules

A key facilitator in this change of attitude has been the minister of commerce, Anas Al-Saleh. A young technocrat with a background in the private sector at the Kuwait Clearing Company, Mr Al-Saleh has not only been responsible for major projects in the EDP – such as the Kd750m Jaber Al-Ahmad Al-Sabah Bridge – being approved by the new government, but he has also helped steer through the new Companies Law, which replaced the Commercial Companies Law of 1960.

“This is a significant step forward for businesses in Kuwait as the new law is set to dramatically improve the way companies are structured and how they operate, ultimately, creating a more level playing field and enhancing the confidence of investors in Kuwait as a solid growth market," says Abdul Aziz Al-Yaqout, the regional managing partner of law firm DLA Piper Middle East.

There are other laws in the pipeline, too. Mr Al-Saleh hopes that by revising the country's build-operate-transfer law and introducing a new investment law, which is expected later in 2013, the country can improve its business environment and attract long-term investors. “We are trying to make the system work better," he says.

Building optimism

Mr Al-Saleh's efforts are helping to build optimism and there is a feeling that the gridlock on projects has ended and that spending is starting. “I am bullish on 2013. It will be a better year,” says Mr Dabdoub, who adds that projects are now being awarded and many more are expected.

Mohammed Sulaiman Al-Omar, chief executive of Kuwait’s second largest bank, Kuwait Finance House, is also changing his outlook. “I am very optimistic," he says. “I believe it is much better today, the government is working hard to deliver results and the support of parliament is there. There is now harmony between the parliament and government and this will help increase government spending.”

Mr Al-Omar believes that the government can help stimulate the economy in areas such as housing. “Kuwait has a growing population and 100,000 housing units are required by Kuwaitis. Housing will help the Kuwaiti economy and, along with new schools and hospitals, will provide a huge boost to the economy. I am very optimistic that 2013 will be a good year for the economy and positive for banks, with new opportunities in trade and privatisation that will all work.”

Notes of caution

Michel Accad, chief executive of Gulf Bank, says that the new Companies Law and corporate governance law are a step in the right direction. But, while he is more optimistic than before, he remains concerned that key developments have been discussed but not yet implemented. Taking a cautious position, he is waiting until one or two of the large projects get underway, as he believes that there is no hard evidence yet of real progress.

NBK’s group chief economist is cautiously optimistic and notes that, as a result of a lot of changes in the environment, NBK has revised its growth figure for the non-oil economy upward from 4% to 5% in 2013. He observes, however, that while the two largest public-private partnership projects in Kuwait have been unfrozen, more than half of the infrastructure projects are not on-budget, confusing the overall picture.

Eduardo Eguren, chief executive of Burgan Bank, is also maintaining a cautious stance. “I don’t see economic movement yet, conditions may have improved but I don’t see a meaningful increase in investment yet. There are plenty of projects and there is growth, but it takes time," he says.

While bankers can see that significant change has taken place since the recent elections and in the first two months of 2013, creating cause for optimism, the consensus is that it will take more time to see real evidence of progress in the project arena and to witness a significant improvement in the economy.

Rallied by ratings

Although the political climate appears to have improved since December, the political opposition has not disappeared. It may return. But as Fitch Ratings noted in 2012: “Kuwait’s sovereign external balance sheet is the strongest of all Fitch-rated countries and means the country’s AA sovereign rating can endure further political instability.”

Fitch added: “If Kuwait manages to resolve the current stalemate, it would confirm its ratings strengths compared with its regional peers. We believe Kuwait’s relatively open political institutions, where the executive is appointed by the unelected Emir and held to account by an elected parliament, reduce the risk of major civil unrest, and this is factored into our rating. World Bank indicators for Voice and Accountability are better than other Gulf Co-operation Council countries.”

Fitch also notes that the pillar of Kuwait’s rating is its strong sovereign and external balance sheet, where it estimates that sovereign net foreign assets stood at $323bn at the end of 2011, (equivalent to 191% of GDP). In addition, the International Monetary Fund estimated Kuwait’s GDP per capita in purchasing power terms at approximately $38,000 in 2010, a similar level to Sweden, indicating another important credit strength.

Optimistic outlook

So what is the outlook for Kuwait? An NBK report in January on government spending showed that seven months into the 2012/2013 fiscal year (from April to October 2012), only 20% of the year's budget had been spent. Total government spending reached Kd4.2bn in the seven-month period compared with Kd6.1bn the previous year.

The report concluded that while spending was sluggish, the budget surpluses continue to stack up: “We remain hopeful that reported spending will accelerate in the coming months as the government pushes forward with the implementation of its four-year EDP.”

In terms of oil, Kuwait’s oil revenues rose 12.6% to Kd22.8bn in the first nine months of the fiscal year to December 2012. Meanwhile, non-oil revenues rose 25.7% in the same period to Kd1.4bn. Oil revenues for the full 2012/2013 fiscal year are estimated by NBK to reach Kd30.4bn, with non-oil revenues due to reach Kd1.9bn.

In examining the 2013/14 fiscal year, NBK forecasts oil revenues of Kd28bn on a base case scenario, an almost 8% decline on 2012/13 as a result of expected lower prices and demand. Nevertheless, crude oil production is expected to reach 3.5 million bpd by 2015 and 4 million bpd by 2020, far more than the 2.8 million bpd in November 2012.

In terms of GDP growth, analysts suggest growth will moderate from the 8.2% achieved in 2011 to 5.2% in 2012 and 4.5% in 2013, as oil production and export growth slows following two years of sharp rises and weaker global demand. These forecasts, however, could be altered by continued improvement in the non-oil economy and better implementation of the EDP, or equally could be adversely affected by regional tensions and global financial issues.

In looking at other indicators, such as inflation, it was a more subdued year in 2012, with inflation averaging a relatively low 2.9%, down from 4.8% in 2011. NBK’s February 2013 report notes: “Overall, inflation in Kuwait in 2012 was more subdued than initially anticipated at the start of the year, largely thanks to the sharp deceleration in food price inflation. A modest pick-up in rents and food inflation – combined with a robust consumer sector in general – could see inflation move higher in 2013. Nonetheless, given the low starting point, NBK expects inflation to remain modest in 2013, averaging 3.5% for the year as a whole.”

FDI trends

In terms of foreign direct investment, flows have been relatively low, but analysts and bankers believe that the new Companies Law will help boost inflows. According to a report by Kuwait Finance House Research, FDI inflows rose by 25.1% to $398.6m in 2011, up from $318.7m in 2010. While flows may have decreased in 2012, an increase is expected in 2013, as a result of recent changes.

Meanwhile, the Kuwait Foreign Investment Bureau (KFIB), an agency established in 2001 to actively promote FDI into Kuwait, says that total FDI applications between 2003 and 2012 amounted to Kd1.88bn, with Kd63m or 3.4% going to the banking sector. The head of the KFIB, Meshaal Jaber Al-Sabah, says that Kuwait needs to attract more foreign investment to reduce the economy's dependency on oil. In order to achieve that, the government is working hard to reduce red tape and to turn the KFIB into Kuwait's official investment promotion agency under a new law, which is due to be passed in the next couple of months.

In another indicator of the new-found confidence in the country's economy, the Kuwait Stock Exchange (KSE) has shown a strong upward trend in the first 10 weeks of 2013. The KSE index was up 5.2% in January to 6245 and, by March 9, had risen a further 5.3% to 6574.8, the highest benchmark in almost two years.

The price index continued its upward journey for 10 consecutive weeks, supported by the performance of many listed small-cap stocks, which witnessed purchasing and quick speculative operations. The 10-week rally shows that confidence and optimism are returning to the markets, and that while there is plenty of caution until real evidence of spending on the EDP emerges, the peripheral signs indicate that, after the turmoil of 2012, stability is slowly but surely returning to Kuwait.

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