Kuwait: The Return

Kuwait is making major efforts to regain its lost position as one of the best performers in the Gulf

Situated at the Northwestern corner of the Arabian (Persian) Gulf, energy-rich Kuwait presents a contrasting mix of political volatility and financial resoluteness. In 2016, the state saw great challenges on both fronts: after three years of relative political stability, the November 26 parliamentary election results brought the opposition back into the fray, with nearly half of the sitting members suffering defeats on 65 assembly seats.

On the economic front, Kuwait posted a rare budget deficit of $15.3 billion in the past financial year, ending 16 straight years of surpluses. Further, the country projects a $28.9 billion deficit for the current fiscal. Revenues have dropped by 45 percent to $45.2 billion, while spending has been cut by 14.8 percent to $60.5 billion.

Political upheaval

Over the years, Kuwait, which accounts for roughly ten percent of the world’s oil reserves, has funded its citizens’ housing, education and healthcare needs. Even during the Arab Spring, it survived by increasing social spending.

However, plunging oil prices and rising fiscal deficits have prompted the state to cut its social security budget and subsidies. Last year, the price of petrol was increased by nearly 83 percent, the first hike in almost two decades. Electricity and water charges on foreign residents were also imposed to lower government expenditures.

These moves turned out to be the government’s undoing, as Islamists and liberals, who had boycotted elections in July 2013, won handsomely in the November 2016 elections, riding on a popular anti-government sentiment. Now, there are fears of political instability as the opposition threatens to slow down policymaking as well as fiscal consolidation reforms.

Safa al-Hashem, a spokesman for the National Assembly’s financial and economic committee, recently said lawmakers had proposed canceling a law allowing a raise in electricity and water tariffs. Also, there is a section of parliamentarians who want a quick reduction in the number of expatriates, who comprise 70 percent of the population, believed to total approximately 4.4 million.

Kuwait’s Emir dissolved the previous National Assembly in October 2016, citing deteriorating security, though analysts believe the actual reason was the assembly’s constant questioning of the austerity measures introduced by the cabinet. Kuwait has seen seven elections in the past decade – three just between 2011 and 2013. Reports indicate that if the tension between the executive and the legislature leads to policy paralysis, the Emir will not hesitate to dissolve Parliament in 2017.

Security challenges

Increasing numbers of terrorist attacks have also cast a shadow over the Gulf state. Security became a focal point after a suicide attack on a Shia mosque in June 2015, which left 27 worshipers dead, and another attempt by militants to target US troops in Kuwait in October 2016. Further, the discovery of ISIS sleeper cells in July 2016 prompted the government to take strict measures that the opposition said stifled free speech and dissent. One such proposal involved collecting DNA samples of all citizens for identification purposes. Predictably, it met stiff resistance and was subsequently put in abeyance.

The present situation echoes one that existed sometime in the late 1980s, when several instances, including the 1983 Kuwait bombings, the attempted assassination of Emir Jaber in 1985 and the 1988 hijacking of Kuwait Airways flight 422, robbed the oil-rich state of the tag of “most developed country in the region”.

Strong fundamentals

Despite political rumblings and a troubled neighborhood, especially Iraq and Palestine, Kuwait’s economic fundamentals look relatively stable. The conservative investment policies the state has pursued since the Iraqi invasion in 1990 have protected it from major losses and helped it absorb much of the shock of fluctuating crude prices.

Emily Hawthorne, Stratfor analyst for MENA, told TRENDS: “Kuwait occupies a unique geopolitical space. Its history with Iraqi invasions shows the risks to it. The al Sabah family was visionary around the middle of the 20th century, when Kuwait had one of the predominant ports in the Gulf. It laid the groundwork of the country’s oil sector and sovereign wealth fund, and brought the regionally important Arab Development Bank.”

The Kuwait Investment Authority (KIA) has the world’s fifth-largest sovereign wealth fund, with $592 billion in assets, mostly in private and global infrastructure projects in the US, Europe and Asia. Kuwait plans to tap into international debt markets through bond issues to finance the deficit this year; it has plans of borrowing up to $10 billion in bonds from international markets.

Longing for the “Golden Era”

But the larger question is whether Kuwait can bring back the “Golden Era” (1946-1982) of prosperity and large-scale modernization, and regain its position as the Gulf’s financial center. After the 1990 invasion, there have been efforts to revive the economy and rebuild national infrastructure, but the political set-up has become a major obstacle to passing budgets and implementing economic reforms.

“A strong pre-oil merchant class that consistently demanded political and economic freedom has ironically prevented the kind of astronomically swift development seen in neighboring states in recent years. Kuwait’s ruling family has consistently found itself forced to accommodate vocal merchants and minorities in ways that the UAE and Qatar have not – [they] have more absolutist governments with less power shared with their elected assemblies,” pointed out Hawthorne.

Besides, the dominant economic role of the public sector, which employs close to 90 percent of the Kuwaiti labor force, overshadows the role of the private sector, which is heavily dependent on government spending. More than 90 percent of Kuwait’s revenue is generated by the state-owned oil sector and economists predict that oil export revenue will continue to account for the bulk of export earnings (nearly 91 percent) till 2019.

“Dubai, Abu Dhabi and Doha have been able to establish profitable non-oil sectors [thanks to] comparatively less demographic stress and smaller local populations than Kuwait and Saudi Arabia. Also, Kuwait is the only state that has had to capitulate to a significant degree to the demands of workers in labor unions, which are uniquely legal in the country. This has helped facilitate Kuwait’s relative dependence on the oil sector to a greater degree than the UAE and Qatar, even though the states are all relatively similar,” added Hawthorne.

Marc-Albert Hamalian, partner with Strategy&, part of the PwC network, says Kuwaiti family businesses should play a bigger role in the diversification. “This has been exacerbated by some specific instances of challenging successions. However, it is important to remember that each family business has its own issues, which means each will have a different starting point and a differentiated path to becoming an institution,” he says. “There is also the Kuwait-specific context of slower national growth and the ripple effects of the restructuring of Kuwaiti investment companies, which tied up capital in non-performing assets. To address these challenges, Kuwaiti family businesses should seek to diversify their exposure regionally and globally.”

The reforms undertaken thus far have streamlined bureaucratic procedures and improved operating conditions for foreign private sector companies. And the Kuwaiti National Development Plan exudes hope, as it requires public enterprises to enable privatization and support to SME development. Going forward, expectations are that the Kuwaiti public machinery will work in tandem with private players to regain the state’s lost glory by ensuring all-inclusive growth.