GCC business outlook: Kuwait
With the election of four women into the Kuwaiti parliament, the Majlis el-Umma,
the northern GCC state has proved once more to be an exception in the GCC. However,
Kuwaiti citizens are now expecting new initiatives from the government to help diversify
the economy. They have good reason to do so: With Kuwait's GDP being heavily dependent
on oil revenues, the economy might post its largest decline in 2009, according to
the IMF.
Kuwait's ruling Al-Sabah family is used to achieving firsts in the region.
Kuwait was the first Gulf state to invest a major stakes in a Western Blue Chip
company, when the government acquired a 13%-stake in German car producer Daimler
(which has since shrunk to 6.9%).
In 1996, the Kuwait Stock Exchange (KSE) was the first Arab capital market to implement
an IT-based trading system.
And on May 16 this year, the Kuwaiti parliament saw the first entry of elected female
deputies in the GCC, a move which was hailed by the global media as an indication
of progress.
Fiscal challenges
This is a state with a total population of 2.7m inhabitants and tremendous wealth.
Kuwaiti nationals visit their doctor free of charge and do not need to pay for domestic
phone calls.
Kuwait accounts for 14% of the
GCC economy. As in the
UAE
and Qatar, over 60% of the country's population are expatriates.
Nevertheless the country, whose name is an Arabic combination of 'fortress at the
sea', is facing challenges.
The political process remains more complex than in any other
GCC
member state.
Declining oil prices weigh on the Kuwait economy, where 95% of the federal budget
is fed by revenues of the 'Black Gold'.
Profit falls
Problems in the financial sector began in 2008 when Gulf Bank posted losses of $1.27bn
(after achieving a profit of $478m the previous year).
National Bank of Kuwait (NBK), the country's biggest lender, also posted declines
in profits, by 8%. And while Saudi Arabia is fighting the crisis with a higher budget
in 2009, the Kuwait 2009/2010 budget envisages a 36% fall.
Parliament's long awaited move to slash taxes on profits from foreign companies
from 55% to 15% triggered a market rally at the KSE but was eventually offset by
the impact of the US credit crunch. As a result, the International Monetary Fund
(IMF) expects Kuwait's GDP to decline by 1.1% in 2009.
Kuwait was also the first country to have a default on an Islamic bond or sukuk.
On May 12, Kuwait-based Investment Dar defaulted on the repayment of a $100m sukuk.
'While Qatar as the leading GCC gas exporter is outperforming
the Gulf union, Kuwait is a key underperformer', says Marios Maratheftis, Regional
Head of Research MEPNA at Standard Charted Bank in Dubai.
Global rating slashed
Women in leading roles in business are not new to Kuwait. A prominent example is
Maha al-Ghunaim, founder and chairperson of investment bank Global Investment House.
Al-Ghunaim has frequently been ranked by Forbes as the most influential business
woman in the Middle East, and her investment funds achieved numerous awards.
Ironically, Al-Ghunaim is also linked to the financial crisis' impact on the Daulat
al-Kuwait, the state of Kuwait. Standard and Poor's downgraded Global to 'default'
after the bank was unable to repay a syndicated loan of $200m (the rating was subsequently
withdrawn on Global's request).
Budget surplus
Nevertheless, Standard and Poor's recently affirmed the sovereign investment grade
credit rating of AA-/A-1 for the state of Kuwait.
With oil prices approaching $70 recently, a government budget surplus of 12.3% of
GDP should be possible. A Financial Stability Law is expected to be ratified by
parliament to attract foreign investment.
A free trade port in northern Bubiyan is under construction and could emerge as
Dubai's Jebel Ali Port's main competitor in relation to goods turnover with the
destination for over 100m consumers in Iran and Iraq.
Investors, however should not overestimate the potential. 'The Kuwaiti macro story
continues to be driven by oil', a Bank of America Merrill Lynch report says.
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