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Kuwait seeks to build a road to revival

Kuwait is positioning itself as a future regional financial, cultural and institutional hub, forging ahead with infrastructure mega-projects and developing private sector investment – apparently unbowed by disputes at home and between its Gulf neighbours. James King reports.
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Kuwait skyline

Visitors flying into Kuwait City today are greeted by views of the mighty Sheikh Jaber Al Ahmad Al Sabah Causeway (SJSC), named after the country's third emir in its constitutional era. This $3bn project, due for completion later in 2018, will link the capital with Subiya in the north of the country, via a 36-kilometre cable-stayed bridge across Kuwait Bay. The impact of this investment will be appreciable, cutting the driving time between the two locations from about 90 minutes to less than 30.

This is significant because the SJSC will offer a vital lifeline for the development of Silk City, a multi-billion-dollar mega-project expected to provide hundreds of thousands of new homes, as well as commercial space, for Kuwait’s growing population. Together, these projects symbolise the ambitions underscoring the government’s development plans. Under a vision of ‘NewKuwait’ the authorities hope to transform the country into a financial, cultural and institutional leader in the region over the coming decades.

Ambition approved

To achieve this vision, far-reaching reforms will be needed in an oil-dominated economy that historically has failed to address the associated imbalances of this dependence. But the government is now demonstrating a real commitment to realising its objectives. While most observers contend that Kuwait is likely to miss the targets it has set for itself – 2035 is the end date for many of these objectives – the government’s direction of travel is, nevertheless, being widely applauded.

Kuwait’s booming project market is a case in point. Not only are its large projects leading to a physical transformation, they are also unlocking new opportunities for growth across a range of economic sectors. “The government in Kuwait remains committed to implementing the projects in the development plan and we have seen this in practice. There have been no project cancellations to speak of and project awards have continued,” says Shaikha Al-Bahar, chief executive of the National Bank of Kuwait.

This has given the non-oil private sector a much-needed boost. “The government’s capital spending programme, along with the execution of the mega-projects, is key to economic activity in Kuwait. This has, in recent years, been the driving force to non-oil gross domestic product [GDP] growth, private sector activity and overall improved sentiment after few years of stagnation,” says Ms Al-Bahar.

Kuwait GDP

She says about $90bn-worth of projects have been awarded over the past five years, though 2017 saw the market dip slightly, compared with the previous three years, with about $12bn in projects awarded. This partly reflects some of the mega-projects that were allocated over that period, including the Clean Fuels Project, involving the upgrade and redevelopment of the Mina Al Ahmadi refinery valued at about $15bn.

Confidence in commitment

But it has not all been plain sailing. The country’s project market is prone to delays and other snags associated with the relatively open and competitive tendering process. “There have certainly been some challenges facing the implementation of the development plan. Indeed, 2017 saw delays and retendering of some major projects, including phase two of the North Al-Zour power and water project and a public-private partnership project,” says Ms Al-Bahar. “Nonetheless, we are confident that the government remains committed to going through with the plan as all projects are seen as essential to Kuwait’s growth.”

Meanwhile, Kuwait has not emerged unscathed from an array of domestic, regional and international challenges. Oil production cuts introduced under the auspices of the Organization of the Petroleum Exporting Countries (OPEC) hit the economy in 2017, with rating agency Standard & Poor’s estimating a contraction of 2.3% for the year.

“OPEC-related oil production cuts have weighed down on Kuwait growth in 2017. However, output should gradually recover, supported by non-oil activity and infrastructure spending, and as oil output is increased once more. The pressure on fiscal and current account balances is easing given the improvement in oil prices,” says Richard Groves, chief executive of Ahli United Bank Kuwait.

Beyond hydrocarbons, Kuwait’s non-oil private sector enjoyed strong growth over the first three quarters of 2017, even though it was unable to compensate for the drop-off in oil-linked activity. As Mr Groves suggests, the economy should experience a lift in the coming years as incremental improvements to the oil price and a healthy pipeline of government-backed projects start to kick in. This is despite an extension to OPEC production cuts that will conclude at the end of 2018.

“Kuwait’s economic growth is expected to gain momentum and return to stronger growth at 4.1% in 2018, supported by the implementation of the five-year development plan [from 2015 to 2020], which has several large infrastructure, transport and petrochemical projects and other major strategic projects,” says Ali A Khajah, chief executive of the Industrial Bank of Kuwait.

Kuwait financing needs

Hitting reserves

In this environment, pressure on government finances has become the new normal. Data from Standard & Poor’s indicates that at the central government level (which excludes income from the Kuwait Investment Authority and other sources of revenue and savings and includes contributions to the Future Generations Fund), the fiscal deficit will reach about 16% of GDP for the fiscal year ending March 31, 2018. The International Monetary Fund (IMF) expects the country’s financing needs to hit $100bn over the next five years.

To finance recent and future budget shortfalls, the government has turned to the country’s General Reserve Fund assets, local debt issuances and a debut dollar-denominated Eurobond transaction. More of the same can be expected in the coming years.

Moving forward, the central government deficit is expected to improve to about 11% of GDP by 2021/22, according to S&P, helped by increased oil production and improved oil prices. In addition, the government is taking slow but steady steps to address its expenditure, and improve Kuwait’s tax regime. In this respect, measures that include price increases on fuel, water and electricity, the impending introduction of value-added tax (VAT) and an excise on tobacco and sugary drinks have all earned praise from the IMF.

But beyond these reforms, the government is also taking encouraging steps to improve Kuwait’s business environment. “The state of Kuwait has done well in improving its business environment, taking vital steps in implementing economic reforms, which has improved its position within the World Bank’s Ease of Doing Business Index for 2018,” says Mr Khajah.

Private sector push

This positive momentum quickly gained the support of Kuwait’s leading business and financial sector figures. With the government’s emphasis on job creation and private sector-led growth, the economy is undergoing significant regulatory reforms designed to support a more diversified economy.

“There are more entrepreneurs establishing new companies in Kuwait. Improvements to the business environment, including changes to the licensing process, have helped in this regard. So too have new laws that permit home-based businesses to operate in the country,” says Mazin Al Nahedh, chief executive of Kuwait Finance House.

Already there are encouraging signs that Kuwait’s steady reform journey is bearing fruit. In September 2017, the country was added to index provider FTSE Russell’s emerging market index following improvements to the capital markets environment. Kuwait’s inclusion could attract flows of more than $800m.

“Kuwait’s upgraded classification to a secondary emerging market status by FTSE Russell is expected to boost the attractiveness of its capital markets with significant growth of traded liquidity at its stock market, Boursa Kuwait,” says Sheikh Dr Meshaal Jaber Al Ahmad Al Sabah, director-general of the Kuwait Direct Investment Promotion Authority.

Looking ahead, the country’s medium-term prospects are promising. Real GDP growth is expected to hit 3.9% in 2018 before moderating slightly to 3.3% in 2019 and 3.2% in 2020. And in a boost for the government and banking sector alike, non-oil growth is expected to remain buoyant over the coming years.

“Growth in non-oil real GDP is expected to accelerate further to 3.5% in 2018 and about 4% in 2019, which will be induced by capital spending and a shift towards a more gradual fiscal adjustment ensuring continued progress on reducing the fiscal shortfall,” says Mr Khajah.

But even if Kuwait’s outlook is bright, several pressing domestic and external challenges loom on the horizon. For instance, lower-than-expected oil prices over a medium-term scenario would expose Kuwait to “unfavourable macro-financial dynamics”, according to the IMF, including higher deficits and financing needs.

Kuwait project market

Middle East unrest

Meanwhile, regional political and security conditions continue to cause concern. So far, the regional blockade of Qatar involving Saudi Arabia, the United Arab Emirates, Egypt and Bahrain has had minimal impact on Kuwaiti banks or businesses, but further deterioration in these relations could change this. However, Elham Mahfouz, chief executive of the Commercial Bank of Kuwait, says: “We have had a very good relationship with Qatari banks for a long time. For us, it’s business as usual, despite the political challenges.”

On the domestic front, the government has further reforms to make. Though much has been achieved over the past few years – particularly in ease of doing business – some of the more politically sensitive reform measures are yet to be passed. These include efforts to control and reduce the public wage bill, which as a percentage of GDP has outgrown nearly all of Kuwait’s Gulf Co-operation Council peers in recent times.

As the IMF has suggested, simplifying and harmonising the public wage structure would help, as would measures to realign public and private sector pay for positions that require equal skill sets. But over the longer term, the government must work diligently to encourage a broader migration of the workforce from the public to the private sector. This is because the state sector provides the overwhelming number of jobs for nationals in Kuwait. As the country continues on its reform journey, addressing this labour market imbalance will be a priority.

Kuwait projected real GDP growth

Meanwhile, new revenue-generating initiatives continue to be introduced. In its latest sovereign rating of Kuwait, S&P Global notes: “Going forward, the key non-oil revenue-enhancing measure will be the introduction of the VAT of 5%, which has been delayed from January 2018 and will likely only be implemented by 2019, subject to parliamentary approval. The government also plans to focus efforts on improving revenue collection, divesting underutilised assets such as land, and implementing its privatisation programme over the next five years.”

Domestic upheaval

But the domestic political environment may hinder or delay some of these reforms. Relations between the parliament and the executive have, historically, been poor. And with about half of the seats in the National Assembly filled by a loose coalition of opposition MPs, there is potential for further trouble down the line, particularly as many of these figures oppose austerity measures.

In a sign of the political challenges facing the government, Kuwait’s entire cabinet resigned in October 2017. Under the constitution, the resignation of a prime minister also requires the resignation of the serving cabinet. And on October 30, the emir accepted the resignation of Kuwait prime minister Sheikh Jaber Al Mubarak Al Hamad Al Sabah. The prime minister’s action was widely seen as an effort to derail the momentum generated by parliamentary opposition figures towards subsidy and price reforms, since the cabinet’s resignation initiates a moratorium on sessions of parliament until a new cabinet is appointed.

Though, at the time of writing, the political situation had calmed following a reshuffle and the appointment of new defence, oil and finance ministers, the incident highlights the precarious domestic landscape that the government must traverse moving forward. But even if the government misses some of its development targets, there is no doubt that today the country is heading in the right direction – and doing so with a greater sense of purpose than ever before.

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