Kuwait
Ready to take wing

Keeping inflationary pressures under check is the main challenge for providing a boost to the economy in 2008

Over the past few years, Kuwait’s economy has often looked like one of the heavily-laden super-tankers that so frequently leave the country’s harbours to make their passage down the Gulf: large, full of oil, and not prone to sudden movements.

The country’s GDP has grown at over 5 per cent a year for five consecutive years to 2006. The combination of high oil revenues, which reached 14.8 billion dinars (US$54 billion) in 2006 (95 per cent of government revenues), massive budget surpluses and the highest national savings rate in the world has led to the emergence of a vision of Kuwait as a oasis of stability. In its Global Competitiveness Report for 2007-2008, the World Economic Forum rated Kuwait the most competitive economy in the GCC, largely by virtue of these firm moorings.

However, the supertanker analogy is not the full picture. Kuwait has also shown itself to be ready to act swiftly and maintain flexibility when necessary. The main event in the country’s economy during 2007, the surprise de-pegging of the Kuwaiti dinar from the US dollar, shows the country’s willingness to act where others in the region have hesitated. The Central Bank of Kuwait’s move from a dollar peg to a heavily dollar-weighted basket of currencies took place in May, as the declining US currency threatened monetary stability throughout the Gulf.

Nevertheless, a number of challenges to Kuwait’s stability are now appearing on the horizon. Inflationary pressures are building up, although they remain much lower than in other regional economies. The annual inflation rate reached a record high in September at over 6 per cent. Despite the dollar de-peg, high global food prices will continue to contribute to price-escalation. Domestically, rapid price hikes in housing also show no sign of slowing down.

But perhaps the greatest challenge will be kick-starting progress in both the oil and non-oil sectors, where a number of high profile projects have stalled in recent years, such as “Project Kuwait” and the Bubiyan Island port. The logic of oil capacity expansion in tandem with industrial diversification has been adopted by almost all GCC economies. While Kuwait agrees to this in theory, progress on the ground has been uneven. Kuwait’s economic indicators suggest that there is plenty of opportunity now for acceleration.

In summary, since 2000 Kuwait has displayed a rising per capita GDP, a growing trade surplus, hefty budget surpluses and steadily increasing inflation. All of which can in some measure be accounted for by the rising price of crude oil, which continued its march toward the US$100 per barrel mark during 2007, though it started slipping towards the end of the year. The population of Kuwait reached 3.37 million by the third quarter of 2007, and per capita GDP stood at US$29,064 at the end of 2006.

The balance of trade for the third quarter of 2007 was accounted for by a 3.2-billion dinar surplus, up 6.5 per cent on Q3 2006. The national budget for 2006 exhibited an 8.8-billion dinar surplus, up from 7.2 billion dinars in 2005. The consumer price index, against 2000 prices, reached 118.7 by Q3 of 2007, with the food and housing sectors showing the strongest growth. On the balance of payments, the country’s current account displayed a 14.8-billion dinar balance at year-end 2006, while the capital and financial account together showed an outflow of 13.6 billion dinars.

In an era of US$80+ per barrel of oil, the commodity is naturally the main motor driving Kuwait’s economy. The hydrocarbons sector accounted for 58.8 per cent of the GDP at the end of 2006, and 70 per cent of GDP growth for the current year can be attributed to oil, according to the Central Bank of Kuwait. Production averaged 2.53 million bpd for 2006, bringing in export revenue of 16.2 billion dinars. But despite the record receipts and the boom-time prices, the outlook for the sector is puzzling. A plan to raise production capacity from the current 2.5 million bpd to 4 million bpd by 2020 has been on the table for a number of years now, but in reality very little has happened.

The expansion plan, known as Project Kuwait, sought to attract international oil companies to help develop fields in the northern part of Kuwait that required greater technological assets than what the state firm, Kuwait Petroleum Company (KPC), possessed. However, as the contractual terms of Project Kuwait did not involve production sharing, the international oil companies found it to be an unattractive proposition, grounding nearly all work on the project. Independent energy analyst Kamal al-Harami argues that a change of culture is needed. “Delays have become a trademark of Kuwait oil projects. We need more international oil companies to come in and we need active leadership in the industry to move forward,” he said.

Encouragingly, deals that plan to use Kuwait’s heavier crude assets that are more expensive to refine but offer better margins at current price levels than the fields under Project Kuwait are now beginning to filter through. An agreement between Kuwait and ExxonMobil to produce 900,000 bpd by 2020 is expected to be finalised by mid-2008. Among its non-oil sectors, the financial sector has shining the brightest, contributing to 68 per cent of the total non-oil growth in 2006. Through 2007, the industry has remained largely shielded from the worldwide credit freeze, partly due to low exposure to US debt markets.

Looking forward, analysts are expecting a greater level of foreign activity in the local banking and investments market, in addition to the recent arrivals of Citibank, BNP Paribas and Bank of Abu Dhabi. In addition, as Faisal Hassan, Head of Research at Global Investment House believes, there has been “an increasing trend of Kuwaiti banks acquiring assets overseas. We expect this trend to pick up momentum in the coming months as domestic competition heats up.” On the regulatory side, pressure continues to mount for the establishment of a capital markets authority. Parliamentarians and the financial services industry have lobbied for the establishment of the body, partly on the grounds that while the Kuwait Stock Exchange is the second-largest bourse by capitalisation in the Arab world at nearly $200 billion, regulation remains basic.

Despite a slowdown in growth during 2006, an upswing in confidence during 2007 saw the industrial sector post the largest growth in borrowings by any sector, indicating greater activity ahead. In particular, the growing building materials industry can expect full order books going forward, as residential and commercial real-estate projects have suffered from the regional price spiral of construction inputs.

The privatisation of Kuwait’s loss-making national airline, Kuwait Airways, may be the major event influencing the country’s transport sector, if progress occurs during 2008. Government agencies reported in December 2007 that the state may eventually divest all of its shareholding in the airline. Kuwait Airways lags behind other regional carriers, and is widely seen as being in need of investment and re-branding. However, following the parliamentary block of an aircraft acquisition deal in August, investors can expect a combative approach from the house on any future sale of the national asset. The combination of high population growth (at an annual rate in excess of 3.4 per cent), an increase in property speculation, and a relative scarcity of land has seen property prices rocket in Kuwait over the past 12 months, leading the sector to become one of Kuwait’s hottest investment destinations. Prices have risen 12 per cent on 2006 levels and further acceleration is expected in the short-term.

Overall, the instability of the country’s northern neighbour notwithstanding, Kuwait has gained a reputation in recent years as an underperformer. But with an enviable level of fiscal stability and if inflation is kept in check, Kuwait can now afford to be a little bolder.

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