Kuwait: Oil habits are hard to break | UAE News Kuwait: Oil habits are hard to break | UAE News
Now Reading
Kuwait: Oil habits are hard to break

Kuwait: Oil habits are hard to break

Kuwait’s oil dependent economy has struggled to keep pace with developments in the UAE and Saudi Arabia, but with a growing non-oil economy and ambitious development plans, the Gulf state could be turning a corner


n what may seem like a familiar course of events for long-time followers of Kuwait, the country’s oil minister Bakheet Al Rashidi,  and the minister of social affairs and labour, and state minister for economic affairs, Hind Al Sabeeh, survived no-confidence votes in May after parliamentary members in opposition had grilled the two for slow development work.

For minister Al Sabeeh, the no-confidence vote was her second in three months, and a sign that members of parliament are seeking to fast-track development projects in the Gulf country.

Read: Kuwait’s oil minister faces no-confidence vote

Kuwait’s political fallouts are frequent and well-documented. The last showdown between the government and MPs, over budget issues, led to the dissolution of the parliament as recently as October 2016 – the 55th time the Kuwaiti parliament had been dissolved since 1962.

But beyond the political logjam, the economic wheels finally appear to be spinning.

Kuwait is coming off a deep 2.5 per cent GDP contraction last year – the worst among Gulf states – as the oil-dependent economy recoiled on the back of lower commodity prices and curtailed oil output cut to support the Organisation of Petroleum Exporting Countries’ decision to collectively cut production by 1.8 million barrels per day.

A turnaround may see the Kuwaiti economy pick up by 1.3 per cent in 2018, and a stellar 3.8 per cent in 2019, according to the International Monetary Fund, second-best after minnow Oman’s projected 4.2 per cent GDP expansion next year.

But even as Kuwait’s overall economy contracted in 2017, its non-oil economy rose 3.3 per cent.

“We expect this trend to continue in 2018 and 2019, with non-oil growth seen accelerating to 3.5 per cent and 4 per cent, respectively,” according to Nemr Kanafani, head of research at National Bank of Kuwait, the country’s largest bank.

The lender attributes the growth to development of major projects as part of the capital spending commitment by the government.

“In March, the government re-iterated this commitment at this year’s Kuwait Investment Forum with its ambitious plan to develop the northern region,” Kanafani wrote in the latest monthly report.

“With the aim of diversifying the economy away from oil and bolstering national security, the plan promises to generate 200,000 jobs for Kuwaitis. This project will boost income and spending, providing an impetus to credit and economic growth over the medium term.”

With Iraq no longer a serious threat to the country’s sovereignty, Kuwait aims to build out its northern region through the ambitious $200bn Gulf Gateway project.

The project aims to generate $220bn to the country’s GDP over time, create as much as 400,000 highly-skilled jobs and attract 3 to 5 million visitors each year, as it transforms the area into a tourism hotspot and another key landmark in China’s cross-country belt and road initiative.

“To change things have prevailed, and to regain our growth we have chosen the Northern Gulf Gateway development, not only as an economic catalyst but also to build a new geopolitical era,” said Sheikh Nasser Sabah Al-Ahmad Al-Sabah, first deputy prime minister and minister of defence.

“Connecting to the Belt Road Initiative, the development will have a world-class airport, industries, a knowledge zone, leisure zone and educational zone.”

The government aims to address chronic low foreign direct investment into the country by attracting investors from Europe, Asia and the United States in the northern region. US aircraft maker Boeing has already confirmed it will set up an office in the country soon.

In many ways, the Gulf Gateway project was Kuwait’s coming out party. With peer Saudi Arabia in the midst of a generational transformational and the UAE already a diversified economic powerhouse, Kuwait has long been seen lagging in ambition.

But the latest oil downturn may serve as a wake-up call for Kuwait.

While the country has remained fiscally sound in past oil downturns – as its break-even oil price has easily been the lowest among its peers – the last oil downturn was structural, and the authorities know that diversification is vital for an economy that relies on oil exports to fund two-thirds of its budget.

The government has embarked on a string of projects since last year to the tune of around KD1bn in each of the four quarters of 2017, and another KD614m in the first three months of 2018, according to MEED Projects.

“The construction sector is expected to be the largest contributor, bringing in up to KD1.8bn in contract awards,” according to National Bank of Kuwait.

“Transport projects may witness more delays than anticipated due to the restructuring of the Public Authority for Roads and Transportation (PART), the government agency responsible for the tendering of these projects.”

As part of the Ministry of Public Works, PART is now in charge of the national railroad and metro public private partnership. NBK expects KD780m in transport contracts over the next few years, across five major contracts.

“In addition, there are projects from the Kuwait Oil Company, Kuwait University, as well as PAHW (Public Authority for Housing Welfare),” said the bank.

Meanwhile, the $4.3bn Terminal 2 of the Kuwait International Airport is set for a soft opening this year.


Other projects include PAHW’s KD470m Jahra and Sulaibiya Low-Cost Housing City, and the KD300m National Guard’s Kazema Camp. Three private-public partnership (PPP) projects, such as Al-Zour North 1 and 2, with a capacity of 1.5GW and 1.8GW are either under way or set to be completed.

Like its regional counterparts, Kuwait is also investing billions in diversifying its energy mix away from crude oil and natural gas and focusing on renewable energy.

The KD360m Dibdibah solar PV power plant project, in the upcoming Shagaya renewable energy complex, is expected to be signed this year, as part of the government’s drive to source 15 per cent of Kuwait’s electricity requirements from renewable energy by 2030.

To be commissioned by The Kuwait Petroleum Corporation, the facility will generate 2,500 GWh/yr (energy requirement at 25 years from commissioning) and cover an estimated 32 square kilometres within the Al-Shegaya Renewable Energy Park, located 100 kilometres west of Kuwait City.

The Arab Petroleum Investment Corporation estimates the country will need to expand capacity by 6GW to 23GW by 2021 to meet rising demand, at an investment of $14bn.

Low-hanging fruits

The FTSE Russell index provided a major boost to the fortunes of the Kuwait Stock Exchange when it upgraded the bourse to emerging market status this year. The KSE will represent 0.5 per cent of the benchmark and see investments valued at $822m flow into the market.

The move will help raise Kuwait’s profile as an international investor destination and encourage domestic companies to list on the market that has international appeal and exposure.

But other reform measures are slow to get off the ground. Kuwait, along with other Gulf governments, had pledged to start implementing value added tax this year to increase non-oil revenues.

While Saudi Arabia and the UAE have already taken the plunge, Kuwait’s efforts have been delayed due to administrative issues. In May, the National Assembly’s budget committee said the government had indicated the tax would be delayed until 2021.

Read: Kuwait to delay VAT implementation until 2021

The Parliamentary Financial and Economic Affairs Committee (PFEAC) also recently approved a bill to tax expatriate remittances that could potentially net the government $200m, according to the International Monetary Fund.

Other reforms have slowed as Kuwait’s sovereign wealth fund and reserves of more than $560bn – or 460 per cent of GDP – has been a source of comfort, but has also paradoxically weakened resolve to invest in new sectors, such as technology, logistics, tourism, light manufacturing and services; all necessary to develop the non-oil economy.

“Significant underspending due to inefficiencies, combined with higher hydrocarbon revenue, resulted in a smaller-than-expected fiscal deficit of 11.9 per cent of GDP last year, compared with to 17.7 per cent in 2016,” according to the Institute of International Finance.

Fitch Ratings, which maintained its long-term AA rating on the country in May, says progress on reforms remains slow as the government aims to be balance public finances, improve the business environment and boost the role of the private sector as a provider of economic growth and jobs for Kuwaiti nationals.

“It is focusing its efforts on regulatory and administrative measures that do not require approval from parliament, which in turn is trying to minimise the immediate costs to its constituents of any reform,” Krisjanis Krustins, the Hong Kong-based director at Fitch, said in a note.

But there are many low-hanging fruits for Kuwaiti authorities if they wish to drive efficiencies and economic growth away from crude oil revenues.

As the last oil shock reverberated through the GCC, most Gulf governments cut energy and fuel subsidies, streamlined public sector spending and actively encouraged citizens to seek private sector employment to reduce the government wage bill.

Kuwait implemented some energy reforms in 2016, but it remains committed to being a welfare state that does not nurture entrepreneurial initiatives and disincentives citizens to set up businesses or seek private sector jobs. As such Kuwait’ government wage bill accounts for 56 per cent of its GDP, compared to 25 per cent for most emerging markets.

Indeed, spending on wages have forced the country to cut capital expenditure, which has fallen to around 4.3 per cent over the past decade, according to the International Monetary Fund, compared to 6.5 per cent in the prior decade.

“The main challenge for the authorities is to formulate a sequence and pace of reforms that generate concrete results under a reasonable timeframe while maintaining consensus in favour of economic transformation,” the IMF said.

The IMF proposes the economy can benefit from a multitude of measures that may be politically challenging but are vital for future generations of Kuwaitis.

These include eliminating fuel subsidies that will save 0.4 per cent of GDP, and raising water and electricity subsidies by half by 2022 to add 2 per cent in GDP savings. Streamlining the wage bill will lead to savings of another 2.3 per cent. These measures are vital, and less controversial as they are already under way in other Gulf economies.

Kuwait’s government has shown some movement towards reform, and efforts by oil exporters such as Saudi Arabia to boost the non-oil economy should spark a debate to find new revenue streams.

But there are concerns a new wave of $75 oil per barrel could dampen the enthusiasm for radical change once again.


Scroll To Top