Kuwait is oil-rich, has an enviable geopolitical location and a well-developed financial sector. James King looks at the obstacles the country is facing in using these attributes to become a serious regional player in the Middle East.

Since global oil prices collapsed in 2014, Kuwait's economy has faced a number of challenges. This environment has contributed to the manoeuvrings of the OPEC+ group (a coalition of the Organisation of the Petroleum Exporting Countries plus 10 other non-members), leading to production cuts from Kuwaiti oil fields. 

Lower oil prices have also dented the country’s growth prospects at a time when political tensions within the Gulf Co-operation Council (GCC) have continued to simmer and take – to varying degrees – their toll on the wider regional operating environment.

But Kuwait has responded with prudence. Public spending, for instance, has focused on infrastructure projects as the government has simultaneously rationalised some non-essential expenditure. In addition, skilfully deployed monetary policy has buttressed the economy, while maintaining the dinar’s competitiveness, against a 2018 backdrop of rising US interest rates. All of this has occurred as the country’s authorities have levitated above the damaging regional political tensions that are embroiling several of its peers.

An enviable armoury

Kuwait’s approach to its political and economic development over the past couple of years has largely been deemed to have struck the right balance. “The past 12 months have been reasonably good for Kuwait’s economy. The country has been performing better than its GCC peers,” says Michel Accad, chief executive of Al Ahli Bank of Kuwait.

This policy environment has dovetailed well with the country’s inherent strengths, including an enviable fiscal break-even price on oil and a formidable government balance sheet, to ensure that its outlook remains much healthier than many of its energy exporting peers.

But far greater difficulties lie on the horizon. Though policy moderation has served Kuwait well in recent years, a more radical approach will be needed in future if it is to going to meet its development objectives. In early 2017, the government unveiled its ambitious reform programme known as New Kuwait Vision 2035, laying out a strategy for transforming the oil-rich state into a commercial and financial hub for the northern Gulf region. The goals detailed in this plan are impressive, but there is less certainty around how they will be achieved.

Public sector dependence

Today, the Kuwaiti economy is driven almost exclusively by government spending,  with even non-oil private sector growth linked to the largesse of the public coffers. Restructuring this system to a private sector-led, knowledge-based market by 2035 will not be easy. “Kuwait has been slower than its regional peers in developing its non-oil and private sectors, and as a result the public sector remains the main source of employment for Kuwaiti nationals and of non-oil growth,” says Thaddeus Best, an analyst at rating agency Moody’s.

Real gross domestic product (GDP) growth in 2019 is expected to dip to 2.2%, from 2.9% in 2018, as a result of oil production cuts linked to the OPEC+ strategy, according to research from the National Bank of Kuwait (NBK). Growth is expected to dip further in 2020, to 2%, for the same reasons. Even so, an economy expanding at an annualised rate of 2% or higher in the current operating environment will be welcome news to the authorities. The country’s medium-term prospects are less clear.

This is because even higher and sustained economic growth will be needed to address Kuwait’s biggest development challenge: its labour market. Today, job creation remains well below labour force growth, a mismatch that is troubling governments across the wider Middle East region. Kuwait’s latest employment statistics will do little to alleviate these concerns.

Though 2018 registered strong improvements to jobs figures, with total employment expanding by 4.2% year on year in December 2018, according to NBK, the public sector accounted for almost all of the job growth for Kuwaiti nationals. Expatriates, meanwhile, were mostly employed in the construction, real estate and hospitality sectors, which tend to be dominated by lower skilled positions.

Labour woes

Trends in the labour market are reflected in Kuwait’s draft budget for the country’s 2019/20 financial year, which includes a 7% rise in wages and salaries. With the public wage bill already at 18% of GDP, according to the  International Monetary Fund (IMF), an increase of this order will do little to appease those concerned about Kuwait’s labour market woes. Moving forward, the government has its work cut out to address the vast public-private sector wage gap, which sits at about 245%, while also providing Kuwaiti nationals with the requisite skills to succeed in its planned knowledge economy.

Meanwhile, reforms to public finances have also been slow. Though the government’s fiscal position has been helped by rising oil prices, in addition to some expenditure rationalisation, it remains at the mercy of the global energy market. Reforms to the country’s subsidy bill, as well as changes to the tax regime, such as the introduction of value-added tax, are sorely needed. As the IMF noted in the concluding statement of its 2018 Article IV mission to Kuwait: “A sustained drop in oil prices would generate unfavourable macro-financial dynamics, with twin deficits, large financing needs and tightening credit conditions with asset quality deterioration. Delays in fiscal and structural reforms could slow growth and increase fiscal deficits at a time when the global environment is becoming more challenging and financial conditions have tightened.”

Infrastructure successes

Nevertheless, some aspects of Kuwait’s development plan are bearing fruit. Infrastructure development is one component for which the government is being lauded. Under the current phase of the New Kuwait Vision 2035 plan (2015-20), the authorities are pursuing widespread project spending to the tune of $103bn to enhance the country’s essential infrastructure. In 2019 there is expected to be an uptick in project execution after a slower year in 2018. Projects under development include the Kuwait City metro system, the $16bn Al Zour refinery and the massive Sheikh Jaber Al Ahmad Al Sabah causeway linking Kuwait City and Subiyah across Kuwait Bay.

“We continue to see strong momentum in the overall execution of Kuwait’s infrastructure development plan. This reflects positively on the improved sentiment in the general business environment and the pick-up in private sector activity. It is clear that the government has strong determination in executing its capital spending programme and accelerating key mega-projects in the country,” says Shaikha Al-Bahar, deputy group chief executive of the NBK.

One of the biggest developments on Kuwait’s project and infrastructure horizon is the Northern Gulf Gateway Project. Unveiled at the Kuwait Investment Forum in 2018, the gateway will act as an integrated residential, commercial and industrial hub to serve the northern Gulf region by offering easy access to the large and underserved markets of Iran and Iraq. As conceived by the Kuwaiti authorities, the Northern Gulf Gateway will add about $220bn to the country's GDP and contribute 400,000 new jobs to the economy.

The project will also be integrated with China’s Belt and Road Initiative, boast its own airport and a container port with an 8 million 20-foot equivalent unit capacity. As a regional hub designed to serve the northern Gulf region, the project also fits well with Kuwait’s ambitions to become a regional leader in the information communications and technology sector. To get there, Kuwait is pushing ahead with plans to develop a new internet and data cable stretching through its own territory and into Iraq and Turkey before eventually reaching Europe.

Beyond these more ambitious projects, the government of Kuwait is also investing heavily in established domestic sectors of the economy. “There has been a healthy amount of spending on the health and education sectors, including important projects such as the Sheikh Jaber Al-Ahmed hospital,” says Elham Mahfouz, chief executive of Commercial Bank of Kuwait.

Moving forward, the Kuwaiti government is pinning its hopes on increased private sector involvement in project development. This is already taking the form of public-private partnerships (PPPs). In late 2018, a German-Kuwaiti consortium signed a $1.6bn agreement to develop the Umm Al-Hayman wastewater treatment plant project in the country. The project will see the construction of a new sewage treatment plant within the existing Umm Al-Hayman water purification facility. “The Umm Al-Haymann wastewater treatment plant points to the success of Kuwait’s burgeoning PPP market,” says Ms Mahfouz.

Foreign investment

Besides PPPs, the government of Kuwait has been pushing hard to attract value-added foreign direct investment. The entity responsible, the Kuwait Direct Investment Promotion Agency, has worked to simplify the investment environment by creating a ‘one-stop shop’ for foreign investors. Efforts have also been directed towards the liberalisation of foreign ownership rules, permitting up to 100% foreign ownership of businesses in specific sectors.

Elsewhere in the economy, Kuwait’s capital markets continue to go from strength to strength. The country’s inclusion in the FTSE Russell Emerging Market index in September 2018 followed a sustained period of reform, which included a relaxation of listing rules and the segmentation of the market based on different disclosure requirements, among others. As a result Boursa Kuwait, the country’s stock exchange, has enjoyed an outstanding period of growth and finished 2018 as one of the region’s best performing exchanges. With the prospect of an MSCI upgrade in the pipeline, to 'emerging market' status from its current 'frontier market' classification, Kuwait’s capital markets ambitions look promising.

For now, Kuwait is in a strong position. Backed by a muscular government balance sheet and a low break-even price of oil, there is little prospect of its current growth trajectory being curtailed by the various internal and external challenges with which it is grappling. Moreover, investments in new economic zones, such as the Northern Gulf Gateway, will go some way to establishing a more diversified economic framework in the coming years. This sentiment is reflected by most of the country’s leading private sector figures.

“We expect economic performance to improve in 2019, supported by a commitment by the government towards its diversification plan. This year, we’re already seeing signs of recovery in the oil sector and we can see a healthy pipeline of project awards during the year,” says Ms Al-Bahar at the NBK.

But over the medium to longer term, the authorities must take more decisive action to address the country’s development challenges. This will require hard choices and a commitment to change that has been lacking throughout Kuwait’s recent history. If the Kuwaiti authorities can get this right, the sky will be the limit. With a small, tech-savvy population, an abundance of natural resources and a favourable geopolitical location, coupled with a well developed financial sector, Kuwait’s potential is almost peerless in the region.


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