KUWAIT: Struggling to improve

Kuwait flagPolitical wrangling has hindered Kuwait’s development plans, but some say progress is coming. George Mitton reports.

Since they were opened in 1979, the Kuwait Towers, with their slender white shafts impaling three glittering blue spheres, have been a symbol of the Gulf emirate. They are an elegant feature of Kuwait’s waterfront, a pleasing backdrop for photographs, and one of the top 10 tourist attractions in Kuwait City, according to users of the website TripAdvisor. There’s only one problem: the towers have been closed since 2012 for maintenance.

It is tempting to see the closure of the towers as a metaphor for Kuwait itself. Blessed with huge oil reserves, Kuwait is one of the wealthiest countries in the world, with a GDP per capita of nearly $45,000, according to 2013 data from the International Monetary Fund. Yet the country has struggled to put its wealth to work.

Its parliament, which is unusually independent by Gulf standards, has been frequently dissolved in the past two decades, most dramatically amid protests during the Arab Spring. The cabinet is often at odds with the parliament, and this has led to frequent changes of personnel. In March, Kuwait’s minister of commerce and industry, Abdulmohsen Al-Madaj, left after public criticism. His resignation came a week after the minister for water and electricity quit after a power cut.

The political deadlock has led to delays in Kuwait’s infrastructure plans. These delays are frustrating not just for Kuwaitis who hope for a boost to the economy from government spending, but for frontier market investors too. Kuwait has a market capitalisation of about $100 billion and is the largest constituent of the MSCI Frontier Market index. The performance of its stock market has significant effects on investor portfolios around the globe.

But is it fair to portray Kuwait as a country that is hamstrung by its politics? Dalia El-Shinnawy, head analyst at KGL Investment Company, a Kuwait-based private equity firm, argues the political differences are a symptom of Kuwait’s democratic system, a system which boasts the oldest elected parliament in the Gulf Arab countries – the National Assembly, established in 1963.

“We don’t agree on calling what is going on in Kuwait political disagreements,” she says. “In order to understand the contemporary political scene in Kuwait, you need to examine the characteristics of Kuwait’s democratic traditions within their historical context.”

El-Shinnawy argues that what is going on is best described “as healthy debate between the government and the parliament with both sides seeking the best interest of Kuwait”. She concedes that this “debate” has caused delays in implementing large infrastructure projects; the government itself acknowledged that only 19% of the five-year developmental plan, which ran between 2010 and 2014, was executed. 

“Nonetheless,” she adds, “there were some very valuable lessons learned from this experience, which will immensely contribute to putting Kuwait on the fast path of recovery.”

On the positive side, previous impediments have been factored in to the new development plan, which is scheduled to run between 2015 and 2020, she says. This plan aims to spend $115 billion on projects in the oil sector, power generation, transport and housing. Many of the projects in the plan have already been approved individually and have been on the government’s agenda for years, she says.

The government has also taken steps to boost private sector participation in the economy. This year, it upgraded the Partnership Technical Bureau to the Kuwait Authority for Partnership Projects, giving it more independence and executive powers to implement large projects. These moves ought to boost the public-private partnership investment model.

Perhaps the most promising sector for investors is transportation. Kuwait has among the highest number of vehicles per square kilometre in the region, yet has a lower road density than Western countries. El-Shinnawy asserts that “lower road density coupled with higher number of vehicles on the road is the major cause of higher reported road accidents”. As a result, the country is rapidly expanding its road network with about $6 billion worth of projects under development.

The country is also planning its first metro project, a network of 60 stations and four lines to pass across Kuwait City, and a national rail project, which is intended to connect Kuwait with the pan-GCC railway network.

Then there is the Boubyan Island port project, with an estimated cost of $4 billion, which is planned to be finished in 2028. The port is part of a larger development called Kuwait’s Silk City, with an overall price tag of about $90 billion. The development’s name is intended to evoke the Silk Road, or Silk Route – the medieval trade route that connected Europe and China, with the Middle East acting as intermediary.

As a private equity investor, KGL Investment hopes to contribute to these projects.

“Additionally,” says El-Shinnawy, “we have identified some opportunities in waste management and infrastructure, as well as pursuing some other greenfield projects, like the establishment of a polyethylene terephthalate (PET) resin complex and, venturing into the education sector, with Kuwait’s first transportation academy, which is currently under study.”

Developments such as these prompt KGL Investment to offer optimistic growth forecasts for Kuwait. El-Shinnawy says she expects 2014 to have matched the growth rate of 2013, estimated at 5.6%, and believes growth can increase towards 6% this year and next.

But is that realistic? As well as political disagreements, Kuwait has to cope with a very low oil price. Kuwait is more reliant on oil than any other Gulf country, with more than 90% of its government revenues coming from oil exports. With Brent crude trading at less than $70 a barrel, the government’s income will be far lower than when the oil price was more than $100.

Kuwait has already said it will cut back on government spending, pulling out of what it calls unnecessary projects to save money. Surely this reduction in government spending will affect GDP growth?

“We expect decreased governmental spending,” admits El-Shinnawy, “albeit not in strategic projects, and greater participation from the private sector, which will enhance private equity returns.”

Of course, Kuwait has its sovereign wealth fund, the Kuwait Investment Authority (KIA), to call on in times of need. The KIA is flush with cash after several years of high oil prices, which gave Kuwait a current account surplus of about a third of its GDP in the six years to 2014. El-Shinnawy adds that the non-oil economy of Kuwait has grown in recent years, helping to reduce the overall dependence on oil prices.

Nevertheless, low oil prices will reduce the government’s appetite for and ability to fund large infrastructure projects. On the upside, this could lead to a bigger role for private investors in funding them. Investors will hope this is the case, as the alternative is that low oil prices become another cause for delay in Kuwait’s economic development.

©2015 funds global mena

Related Articles