Complex Made Simple

How Kuwait is transforming into a business powerhouse

Kuwait has earned the right to occupy its rightful place in regional business, despite issues the country needs to face to achieve its full potential.

The small GCC nation, sitting on the world’s 4th largest oil reserves (oil sales make 40% of GDP and 92% of export revenues), is carving a new direction, building a $600bn wealth fund, spending to maximize returns and building a solid financial infrastructure to sustain the momentum.

Reforms delayed but coming

Following the 2016 deficit, Kuwait introduced subsidy cuts on oil, water, and electricity (major burdens to public financing prior).

“The cuts dampened confidence of the Kuwaitis and raised living costs for the lower income population, with inflation rising to around 3.3% YOY. However, since then, fiscal reforms have largely been suspended,” said The FrontierStrategyGroup.

Kuwait parliament is increasingly sensitive to burdens on consumer budgets, postponing the imposition of the 5% VAT until 2021. Excise duties on tobacco, energy drinks, and carbonated drinks are to be voted upon in October and are expected to be introduced sooner than 2021, according to The FrontierStrategyGroup.

Read: Kuwait Ratings Affirmed At ‘AA/A-1+’; Outlook Stable

Kuwait’s new business landscape

Kuwait hopes to push ahead with reforms to diversify away from oil, the Financial Times (FT) reports.

According to a recent report from National Bank of Kuwait (NBK), the country’s non-oil economy grew by 3.3% in 2017, up 2% from the previous year.

The FrontierStrategyGroup said in a July report that Kuwait’s parliament passed its budget for the 2018/2019 fiscal year in June included a significant spending increase despite its sizeable fiscal deficit. Kuwait’s economic growth has been driven by the non-oil sector in Q1 2018, which expanded 2.7% YOY.

Kuwait’s inclusion in FTSE’s secondary emerging-market index is expected to attract passive inflows of around $800 million in the second half of this year, according to Bloomberg.

Read: Kuwait registers a $15.86bn budget deficit

Private sector support

Kuwait has pledged to partner with the business community, earmarking $100bn for infrastructure investment, noted FT.

“It is opening up to foreign investors committed to creating jobs for Kuwaiti nationals, who make up only 21% of workers in the private sector,” said FT.

“The coming generations understand that their future cannot be built in the same old way, and you will see more movement into the private sector,” says Khalid Mahdi, Secretary-General of Kuwait’s Supreme Council for Planning and Development.

The International Monetary Fund identifies reform and project delays as major risks to the country’s outlook, alongside lower oil prices and regional security challenges.

China and Kuwait signed bilateral agreements proposing investments in the Gulf state during Emir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah’s visit to China in July.

The Northern Gulf Gateway mega-city plan is expected to add as much as $220bn to the country’s GDP and aims to attract $200bn in foreign direct investment, opening the doors for investment from American, European, Chinese and Asian investors, reports Arabian Business (AB).

“The development also plans to create as many as 400,000 jobs, as well as attract between three and five million visitors annually by opening up new investment opportunities in the tourism, hospitality and leisure sectors.”

Read: Kuwait rescinds expat remittance tax

Silk City jobs

The total amount allocated for providing salaries to the employees of the government sector will increase to KD 24 billion ($79bn) after 2025, reports Al-Nahar daily quoting governmental sources, and published by Arab Times online.

They indicated that the country’s budget might increase to KD 40 billion ($132bn), and the number of expatriates will increase to 5 million with the opening of the Silk City Project.

Read: The future for expats in Kuwait just got bleaker: 3100 laid off

Good finances

Net profits at the biggest lender, National Bank of Kuwait, rose more than 13% in H1, 2018, up from 9% in the same period in 2017, fuelled by loan growth of 6% reported FT.

The second-biggest bank, Kuwait Finance House, enjoyed a 16% rise in net profits.

Richard Groves, chief executive of Kuwait’s Ahli United Bank said:

“There are many reasons to be optimistic about the future, given the growth in the economy and more favorable oil price”.

Capital markets reform, and the country’s recent addition to the FTSE Russell emerging markets index, mean banks expect a significant increase in trading and financing activities, said FT.

Roger Winfield, HSBC’s chief executive in Kuwait, is enthusiastic about the potential for the country’s capital markets. He expects Kuwait’s inclusion in the FTSE Russell index to drive about $1bn of new money into the market in the three months after it joins the index.

Raghu Mandagolathur, an executive vice-president at Markaz, an asset management company, describes government spending on development plans and support for small and medium-sized companies, as the “key source for banks’ credit.

Read Kuwait real estate sales robust in Q2 ’18: Investor restrictions coming

Happiness index

A mark of any growing economy is its happiness index and Kuwait ranked 45th out of 156 countries with a score of 6.083 in the 2018 World Happiness Report published this Wednesday.

Kuwait ranked 34th out of 117 countries with a score of 6.207 in the happiness ranking for resident expats.

In the ranking of GCC countries’ happiness levels, the UAE took the highest spot at 20th with a score of 6.774.

Saudi Arabia scored in 33rd place with a score of 6.371, while Bahrain was 43rd with a score of 6.105.