Following the smooth political transition to new leadership under the new Amir, Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah, after the death in January of the ailing Amir, Sheikh Jaber, the stage has been set for some major structural changes in Kuwait, which range from getting huge, long-awaited ventures, such as Project Kuwait, off the ground, to putting the new ruler’s vision of Kuwait as a regional financial centre (see page 120) into practice.
But money is not the issue. With about 8% of the world’s oil reserves and, according to an April International Monetary Fund (IMF) report, external current account annual surpluses in 2004-2005 averaging $25bn (37% of GDP), Kuwait is awash with funds.
Political wrangling
Implementation is the key. And this is where the challenges lie. Project Kuwait (the $8.5bn development of the North Fields) is a highly advantageous project to increase oil output by 370,000 barrels a day that has been talked about since 1997 but has not yet achieved the necessary political consensus.
“Kuwaiti politics slows things down a lot,” explains Commercial Bank (CBK) chairman Abdulmajeed Alshatti, and this is why projects can take significantly longer and cost significantly more to complete. While Kuwait can claim a parliament, members appear to take a very narrow view of their responsibilities, acting as glorified union bosses and causing major delays to critical legislation. With about 95% of Kuwaitis employed by the government, labour issues are of intense interest, and hence structural reforms that might lead to job losses are delayed or blocked in parliament.
As a result, privatisations at any credible level have not happened and the long-awaited Privatisation Law, among others, has not been approved. An economist explained that it took 15 years for the government to sell 60 state-owned petrol stations. The privatisation of Kuwait Airways is often discussed but bankers’ views are mixed. Some say it will never happen because of bloated staffing levels and because parliament will never agree. Others believe the airline can be turned into a commercial entity, made to genuinely compete with other carriers in the region and the labour issue can be solved. The discussion continues.
Potential potholes
But with the painfully slow bureaucracy, talk of corruption and the lack of a strategic plan mentioned regularly, the problem of implementation remains the new Amir’s prime difficulty. The IMF agrees that although progress has been made, “implementation of the reform agenda has been slower than expected, in part, due to difficulties in reaching a political consensus.” It adds: “The apparent lack of a comprehensive strategic plan for non-oil sector development has led to piecemeal and ad hoc efforts towards reforms in various areas, which may not enable Kuwait to realise its national objectives, and over time its economic performance could fall behind other GCC [Gulf Cooperation Council] countries.”
The new Amir has the opportunity to make significant changes in both the oil and non-oil sectors and with ex-Iraqi president Saddam Hussein out of the picture there is now much greater confidence to invest. Although investment in the economy has increased significantly in recent years, gross domestic investment as a percentage of GDP has remained low at 14% in 2004, but this looks like changing.
Domestic investment
Industry specialist MEED reports that $10bn in oil-related projects was signed in 2005, more than the total for the previous five years, and more than $20bn is expected to be signed in 2006.
And bankers are also enthused by a new initiative, called Silk City, which some say is likely to become the new capital for Kuwait, and a Kd25bn-Kd27bn ($87bn-$93bn) project that will create another huge range of opportunities. With a new refinery under way, the development of Bubiyan and Failaka islands and Kuwait’s increasing role as an entrepôt and supply route for Iraq, there is no shortage of projects or possibilities. The question is if the political will exists to get them done.
Looking forward, the macroeconomic environment and the banking sector provide Kuwait with a solid platform for progress and for the forecast boom years ahead. Although oil accounted for 50% of Kuwait’s GDP in 2000-2005 and it remains one of the least diversified economies in the GCC region, 2005 provided extraordinary growth in oil revenues and a massive boost to already bulging government coffers. According to National Bank of Kuwait (NBK) chief economist Randa Azar-Khoury, oil revenues jumped by 60% to Kd11.8bn in the first 11 months of fiscal 2005/2006, ending March 2006, constituting 95% of total budget revenues. Kuwait export crude averaged $51 a barrel – up 48% over the same period last year – while Kuwait’s production averaged 2.5 million barrels a day, up 7%.
Oil revenues were more than three times the budget projection due to conservative price and production assumptions adopted in the official budget of $21 a barrel and 2 million barrels a day respectively. NBK estimates a budget surplus for the 2005/2006 fiscal year of Kd6.7bn before the 10% allocation to the Reserve Fund for Future Generations (RFFG).
In the 2006/07 fiscal year, NBK forecasts yet another bumper year. With a base export price assumption of $53.7 a barrel, revenues could reach $14.2bn and if all draft budget spending is achieved the budget surplus for 2006/07 would still be Kd5.6bn, a significant sum by any standard. And if oil prices extend beyond $70 a barrel for a significant period, as seems possible, the net effect on Kuwait’s revenue stream is yet another quantum leap forward.
Even the IMF Article IV report gave a positive outlook based on high oil prices: “Over the medium term, Kuwait’s financial position is projected to remain strong. The large external current account and fiscal surpluses are expected to lead to a build-up of a large stock of financial assets for future generations. However, GDP growth (real GDP growth was strong averaging 7.5% in 2004-05) is expected to slow down unless the pace of structural reforms accelerates.”
While the banking sector had another record year of profits in 2005 (see page 122) and appears well placed for the expected boom to come, the stock market correction early in the year (the market dropped by a record 14% in March) and larger market declines elsewhere in the Gulf, where Saudi Arabia’s all shares index has halved since February, have given bankers some cause for concern. Rating agency Moody’s has recently cautioned about an asset bubble in the region and that banks may not know the full extent of the possible problem until loans can be assessed later in the year.
Nevertheless the banking and financial sector is seen as strong and able to withstand any reasonable correction. The IMF notes: “Financial stability is based on strong bank capitalisation [capital adequacy ratio of 17.3%], household borrowings guaranteed against salaries, and moderate exposure to equity market risk [at 9% of total loan portfolio, including non-Kuwaiti securities].”
Strong foundations
All in all, Kuwait has economic fundamentals that other countries only dream about and Kuwait’s oil position is not going to disappear; it should, without too much effort, be able to increase production and increase revenues, providing boom conditions for all.
But while much of this good fortune can just come straight out of the ground, much also requires robust leadership and structural change. The vision of a new regional financial centre, among other key projects, needs focus, commitment and implementation, or else it will whither away. The new leadership has the opportunity and the resources to give Kuwait what it has been lacking, the coming months will see if it has the will to make it happen.
