Kuwait is emerging as a stable, business- friendly destination with an upbeat private sector and an economy moving away from its reliance on oil and the days when it was hit hard by the global financial crisis and a stagnant domestic political scene, James King writes for The Banker.
Although the recent fall in world oil prices has hit many energy exporters hard, the situation in Kuwait is altogether different. With enviable fiscal breakeven costs of about $48 per barrel, the country is now moving to the next stage of its economic growth with the help of long-awaited government infrastructure projects and a more pro-business political environment.
These positive trends reflect in the country’s accelerating gross domestic product (GDP) growth, which is expected to reach 1.8% this year, up from 1.4% in 2014, according to the International Monetary Fund (IMF). Although these numbers can be considered relatively low in a region better known for its slow pace of economic development, Kuwait is still feeling the effects of the global financial crisis, as well as a challenging political backdrop which has often impeded economic development. The country’s upward trajectory is backed by a track record of double-digit fiscal surpluses recorded every year since 1998, according to Fitch Ratings.
Today, the country’s private sector is looking forward to a period of sustained growth. In recent years, Kuwait’s often fractious political environment was the cause of delays to a number of significant infrastructure and development projects. Yet, the election of this more government-friendly Parliament in June 2013 has put an end to such paralysis. According to research conducted by the National Bank of Kuwait, project activity in the country was among the fastest expanding among the Gulf Cooperation Council countries in 2014. In total, close to KD 7.3bn ($24.38bn) of contracts were awarded last year, nearly four times the number from 2013.
Both the government and the private sector are looking to capitalize on this momentum moving forward with the value of the country’s project market expected to reach KD 14 billion in 2015. The launch of Kuwait’s National Development Plan for 2015 to 2020, the latest package in a wider program of reform designed to transform the country into a trading and financial centre by 2035, will be a key source of this spending. “The government’s latest five-year plan targets total public infrastructure spending of KD 34 billion, with KD 6.6 billion (expected for 2015).
Even if those targets are not fully realized, the large size and improved execution should significantly support investment spending and GDP growth in the years ahead,” says Elias Bikhazi, group chief economist with the National Bank of Kuwait. Some of the larger projects currently being executed are concentrated in the country’s oil and gas sector. The long-delayed Clean Fuels Project, comprised of various upgrades and improvements to the Mina Abdulla and Mina Al Ahmadi refineries, is valued at KD 4.6 billion. Similarly, the so-called New Refinery project includes the development of a 615,000-barrels-per-day refinery in the south of Kuwait, valued at KD 4 billion. In terms of upstream operations, a contract was awarded in January for the development of the Lower Fars Heavy Oil production facility for KD 1.1bn. A further KD 6.5 billion-worth of hydrocarbons contracts are expected for 2015, according to the National Bank of Kuwait.
These investments will form part of Kuwait’s ambitious plans to increase oil production from 3 million barrels per day (bpd) to 4 million bpd by 2020. Though this strategy has now been saddled with an added dimension of risk, in light of the lower oil price environment, confidence in the country’s longer term energy potential remains high. Meanwhile, major construction contracts were also awarded in 2014, covering the development of new healthcare facilities worth KD 1.7bn. In the power and transport sectors, the country awarded about KD 283 million and KD 267 millionworth of contracts last year, respectively, covering the development of power generation facilities, ports and a new airport terminal, among other projects.
The roll out of the National Fund for SMEs Development, approved by parliament in March 2013 and expected to be fully operational by the end of 2015, will be a significant step to realizing this. With a total value of KD 2bn, the fund will act to support various business sectors, including intellectual and servicebased activities, industry and agriculture, among others. The aim of the fund, which will operate in partnership with local banks, is to support the entrepreneurship and employment of Kuwaiti nationals, while boosting non-oil growth. While these positive developments have improved Kuwait’s medium-term economic outlook, less progress has been made on much-needed public sector finance reform. Though Anas Al Saleh, the country’s finance minister, has devoted significant energy towards implementing changes, progress has been relatively slow to date. According to estimates from Fitch Ratings, public sector salaries and generous energy and water subsidies account for about 75 percent of total government spending in Kuwait. In a politically sensitive move, the government lifted subsidies on diesel and kerosene in October 2014 in an effort to enforce greater budgetary discipline.
Yet by February of this year, these subsidies were back following strong criticism of the government from members of Kuwait’s parliament. Planned price hikes on water and electricity have also been postponed. At present, the government is considering a number of reforms to public sector wages. Changes under consideration include the standardization of salaries across public sector jobs, improving the existing payroll system and linking performance management with promotions, according to the IMF. For Kuwait, these issues will be vital to address.
The prospects of an attractive public sector employment package are diverting much needed youth, energy and expertise away from the private sector. The IMF says: “(Kuwait’s) growth model has so far relied on oil revenues to invest in public employment, health, education and infrastructure, and achieved rapid economic development. Transitioning to a more balanced private sector-driven model that encourages firms to export requires significant progress in implementing structural reforms to improve the business environment, governance, and institutional and policy-making frameworks. In addition, strengthening the incentives for employment of nationals in the private non-oil sectors would entail containing growth in public sector wages and jobs.” These challenges aside, Kuwait is on the right track. Optimism is building in Kuwait City, with most bankers and private sector participants now gearing up for a period of sustained growth.
The country’s ability to withstand the lower oil price environment, its strong fiscal position and sovereign net assets that amount to 269 percent of GDP, according to Fitch Ratings, mean that the government can move forward with its plans for economic development. As such, Kuwait now has a golden opportunity to achieve some of its long-standing growth objectives, while implementing the kind of reforms needed to develop a truly sustainable economic model. — The Banker