Kuwaiti financial institutions face an enviable problem: where to invest the fruits of an oil boom in which, according to National Bank of Kuwait’s (NBK) July economic brief, gross domestic product (GDP) rose by 35% to reach $81bn in 2005, following two strong years of 23% annual average growth. On a per capita basis, GDP reached $34,482 in Kuwait for 2005, compared with $52,896 in Qatar and $12,897 in Saudi Arabia.
The figures are exceptional: according to NBK chief economist Randa Azar-Khoury, oil revenues rose by 60% to Kd11.8bn ($40.8bn) in the April 2005/February 2006 period, constituting 95% of total budget revenues.
This economic cushion places Kuwait in a comfort zone, where huge revenues and confidence in oil are driving a regional investment binge by Kuwaiti companies. A flavour of the banking sector’s buoyancy was apparent in The Banker’s recent survey of Kuwait (July 2006), in which Sheikh Salem Abdul Aziz Al-Sabah, governor of the Central Bank of Kuwait, observed: “In the past few years, Kuwait’s economic performance has been exceptionally good. Record oil revenues, rising GDP, widening budget and current-account surpluses, and low inflation have combined to secure an economic boom that is expected to continue in the foreseeable future.
“It is important, however, to recognise that these strong indicators are mostly outcomes of external forces.” Kuwait should exploit that, he argued, “to address long-standing challenges, such as economic diversification and employment generation” while times were good.
Political change
Kuwait’s leaders have a range of opposition groups and a lively civil society to remind them of this. In the Gulf Co-operation Council (GCC) region’s feistiest democracy, the new macroeconomic platform of growth and liquidity is helping to offset nerves on the political front following parliamentary elections on June 29 in which opposition groups emerged as winners.
The opposition won out despite what one observer called “reports of lavish behind-the-scenes financial support for pro-government candidates”. An even livelier National Assembly may not reassure potential foreign investors, who have long been waiting for their chance to enter Kuwait’s energy sector via the estimated $8.5bn Project Kuwait scheme and privatisations of major companies in a state-dominated economy. As Abdulmajeed Alshatti, Commercial Bank of Kuwait chairman, told The Banker: “Kuwaiti politics slows things down a lot.”
In the parliamentary election, candidates committed to the opposition Group of 29/Alliance for Change’s electoral reform agenda captured 34 seats, and at least 11 MPs regarded as government loyalists and supporters of the status quo were ousted. In the ranks of the Alliance, Islamist groups made the biggest gains, in particular the Islamic Constitutional Movement, Kuwait’s equivalent of the Muslim Brotherhood. However, the situation should not be over-dramatised: the Alliance for Change represents the entire political spectrum, including liberals, Sunni and Salafi Islamists, Shiites, political independents and members of the Popular Bloc.
The biggest problem, comments a liberal-leaning banker, is that “populist sentiments will again halt progress on reform and the big investment projects”. Just how far the new National Assembly will go in trying to block reform moves will become apparent in October, when MPs return from the long summer break.
Flagship oil plan
Meanwhile, oil companies and their advisers are looking on anxiously for signs of further movement on Project Kuwait, the government’s flagship plan for the development of northern oilfields, which is to be led by foreign oil majors. The scheme has been on the drawing board for years and has often fallen victim to the Kuwaiti political system, with some opposition MPs against the project. Its current estimated $8.5bn cost is up from an earlier $7bn, showing how it is not just revenues in the oil sector that have been rising.
Popular Bloc leader Ahmed Al-Saadoun told an election rally last month: “They call it Project Kuwait; in fact it is a project to steal Kuwait and its wealth.”
Mr Al-Saadoun will certainly ask hard questions about the project when it returns to the parliamentary agenda; the Popular Bloc has led objections to the opening of the country’s upstream oil sector to outsiders.
Feelgood factor
At least other developments are under way to consolidate the oil price spike feelgood factor. Investors are making interested noises in proposals for a spectacular new urban development on Kuwait Bay’s north shore, Silk City. The UK-based Civicarts proposal for Silk City includes a finance city hosting seven business centres for trade and finance; a cultural city with galleries and museums; an environmental city with wildlife resorts, parks and lakes; residential areas to accommodate about 700,000 people; and a commercial area, including a free zone and airport.
Despite backing from the ruling family (the two real estate companies behind the Silk City project, Tamdeen Real Estate and Ajial Real Estate, have high-level connections), dazzling architectural drawings by the best European practices are no substitute for practical progress towards the implementation of major investments in a country that is notorious for its procrastination over major schemes.
Regional deployment
Kuwaiti financial institutions are increasingly redeploying capital in other Middle Eastern economies, rather than internationally, which economists says is an unprecedented phenomenon. In the past 12 months, Kuwaiti investment banks and companies have opened branches and representative offices in other GCC states, invested in large business and residential projects in Syria and Jordan, and bought stakes in regional banks. “These are all in areas they understand,” the liberal banker comments.
Gulf investors are watching Syria keenly, especially the UAE’s Emaar Properties’ ground-breaking $500m Eighth Gate development in Yafour, with plans to create socio-economic developmental projects around Damascus. Kuwait is close behind: Kuwait-based institutions’ operations in Syria, which is regarded as a high-risk pariah state by most Western institutions, show the extent to which the current boom is taking on a regional, cross-border dimension.
In June 2005, Kuwaiti-Syrian Holding Company (KSHC) announced plans to establish an Islamic bank in Syria, together with two Kuwait-based firms, Global Investment House (Global) and International Holding Projects Group. KSHC has submitted a licensing request to Syria’s central bank for an Islamic bank with a capital of $100m.
Aref Investment Group, an Islamic financial services firm that is largely owned by Kuwait Finance House (KFH), last December unveiled the $500m first stage of a business and trade district, to be built on the outskirts of Damascus, Syria, and due to open in 2007. Aref chairman Ali Fahd Al-Zmei’a has played down concerns over international pressure on Syria saying he believes that political circumstances will be short-lived. When the project is finished – scheduled within five years – the Investment and Development City will house the Damascus stock exchange, complexes for investment and financial firms, a financial research centre and trade fair grounds, with the final cost billed at $3bn-$4bn, according to Syrian media.
Aref is also interested in the privatisation of two state-owned Pakistani gas companies.
Kuwait-based Investment Dar (TID) is involved in the new Syrian Islamic bank, Al-Sham Bank. Kuwait’s Injazzat Real Estate Development Company subsidiary Al-Shall Investment and Consulting Company submitted a request for a licence for Al-Sham to the Syrian government in March. The Jeddah-based Islamic Development Bank and Commercial Bank of Kuwait also have stakes.
TID recently announced plans to invest heavily in Bahrain. Its chairman and managing director, Adnan Al-Musallam, told investors: “TID has a $500m investment plan for Bahrain. We are going to invest $300m in building infrastructure and $200m in an investment bank.” Last month, TID increased its stake in Bahrain Islamic Bank from 33.85% to 40%. At home, TID’s real estate subsidiary, Khabary Holding, is behind the $450m Khabary City, a real estate development, which will include hotel facilities, a specialised hospital, private schools, and mixed-use commercial towers in Fahaheel, south of Kuwait City.
Global is particularly active on the regional investment scene, with the acquisition of a 42.8% stake in the Karachi-based Jahangir Siddiqui Capital Markets Limited (JSCM). In late June, Global also received a licence from the Qatar Financial Centre Regulatory Authority to operate in Doha.
Banks of the Jordan
Global’s acquisition in April of a 22% stake in the Jordan-based Société Générale de Banque-Jordanie, signalled, as vice-chairman Maha Al-Ghunaim said, that it was “looking into expanding into key emerging markets… [among] many steps taken by Global to achieve its expansionary goal.” The Jordan investment comes on the heels of Global’s announcement of the establishment of First Jordan Investment Company, with a paid-up capital of $141m. In a busy June, Global also sold a 14% stake in Jordan’s Umniah Mobile Communications to Bahrain Telecommunications Company (Batelco), earning $7.5m in the process.
Jordan is proving very attractive to Kuwaiti investors. Bayan Investment Company, founded in 1997, announced plans to invest about $720m in four real estate projects in Amman, including a $300m office and commercial complex in Al-Abdali Urban Regeneration Project. Global is also eyeing the Egyptian market.
With the Ankara government improving ties to GCC states and welcoming Arab investment, the recent pattern of investment from Gulf investors also highlights Turkey’s popularity. Privatisations due soon, which will include electricity distribution, state-owned Halkbank, ports and sugar factories, are likely to attract further Arab investment.
Although Kuwait’s MTC lost out in its bid for Turkey’s mobile firm Telsim last year, other Kuwaiti groups have been more successful. In early July, The International Investor (TII) won the second tender to buy Adabank, submitting a bid of $29m. TII Turkey director Fehmi Akin says TII plans to turn the small private commercial bank, established in 1984, into an Islamic bank with a focus on retail.
The Kuwait Stock Exchange-listed KFH, which reported first quarter net profit of $274.2m, plans to establish a specialised investment company with a capital of $100m in Turkey, through Kuwait Turk Bank (previously known as Kuwait Turkish Evkaf Finance House), an Istanbul-based bank in which KFH holds a substantial stake. Mohammed Suleiman Al-Omar, KFH’s general manager and Kuwait Turk Bank (KTB) chairman, says: “The new company will focus on the development of railways and residential complexes, healthcare and medical institutions.”Fawaz Al-Issa, KTB deputy chief executive, will head the new company.
Asian Islamic play
On July 5, KFH – reportedly the first foreign Islamic bank to operate in Malaysia – said it was eyeing investment in several projects linked to the Ninth Malaysia Plan, Malaysia’s latest development policy. KFH Malaysia managing director Salman Younis says KFH is looking at the two growth areas of Penang and Johor, and noted that the Penang project “is a very large one, while there is a 50% chance that we will get one project in Johor Bahru”.
KFH Malaysia, established in 2005, has already invested in three real estate projects in Malaysia, all in the Klang valley. “We are bullish on Malaysia. Not just the real estate business but in all areas, including plantation, aviation, industrial warehousing and even education,” says Mr Younis. “Our interest in real estate investment is not confined to Malaysia but also the region, especially China, Thailand, Indonesia and Singapore.”
Closer to home, there are also investments within the GCC. Kuwait Investment Company (KIC), largely owned by the state’s Kuwait Investment Authority arm, has been investing heavily in the Gulf.
Although it recently sold its stake in Bank of Bahrain and Kuwait, KIC looks set to remain prominent in the Manama (Bahrain) banking scene. There are reports that it is involved in a new Islamic investment bank for women, Masrafy, to be based at the Bahrain Financial Harbour. Bahrain Monetary Agency has granted an initial licence for the bank, which will have an authorised capital of $1bn and a paid up capital of $500m.
