Country Report Kuwait
The new parliament has an opportunity to push through economic reforms if it can control the traditionally high tensions with the government. Major challenges to boost the country’s important oil-sector remain. The plans to cut down the number of expatriate workers seem unfeasible.
Strengths and weaknesses
Strong external and fiscal position
Kuwait’s continuously high oil export revenues have resulted in fiscal and external surpluses for thirteen years in a row. Public debt is very low at 6% of GDP and the external liquidity indicators are very strong.
Political disputes hinder reform
Continuous clashes between parliament and government severely hinder any progress on much-needed economic reforms.
Narrow economy is too dependent on the oil sector
The economic structure of Kuwait is very weak with the high dependence on oil export revenues resulting in a very high vulnerability to fluctuations of global oil prices.
1. Opportunity for a new political start?
An important recent development in Kuwaiti politics is the makeup of the new parliament, as this new parliament is more balanced. The previous parliaments were dominated by hardline opposition figures on one side and pro-government loyalists on the other side. In the July 27th 2013 elections, three liberal candidates and a mainstream opposition bloc gained significantly. Until now, conflicts between the government, appointed by the royal Al-Sahab family, and the elected members of parliament (MPs), have been fierce for years. This has resulted in a non-functioning relationship and has delayed any significant reforms. But the newly elected parliament could change that, especially since the large number of new MPs signals the emergence of a political class less tainted by the inflammatory experience of the past two parliaments, and the higher than expected turnout gives the National Assembly greater political and public legitimacy. As such, we believe that politics could become less volatile this year than in 2012, in which we witnessed fierce coalition breakups and election boycotts. If co-operation with the government improves, this could mean that long-awaited and much-needed reforms such as the launch of large-scale infrastructure plans can be implemented. We do expect implementation to be slow, as government effectiveness remains limited, but it could be a start. We remain concerned about the lack of further economic diversification plans, something the economy needs to ensure long-term sustainable growth. Until now, GDP growth has been boosted by the oil-sector and by government-financed consumption (low interest rates and various subsidies) instead of investments. Overall, it remains too early to say that a decisive turning point has been reached in Kuwait's long-running political crisis, but the opportunity for a fresh start is here.
2. Uncertain outlook for the oil sector
The oil industry continues to play a pivotal role in the Kuwaiti economy, as Kuwait has the seventh-largest proven oil reserves in the world. As the world's eighth-largest oil producer, oil income comprises over 90% of budget revenue and merchandise exports. While ambitious plans have been made to improve the oil sector even further, major challenges still lie ahead. Plans include the exploitation of a new oilfield which could help to raise Kuwait's oil production capacity from around 3.4m barrels/day (b/d) to its target of 4m b/d by 2020. Also, the government plans to invest USD 100bn in upstream and downstream ventures over the next five years, which include the construction a new refinery and upgrades the country's existing refineries. These plans seem feasible, but if Kuwait is to preserve its exportable surplus of oil, it needs to secure further production increases, since domestic oil consumption has been increasing due to rapidly expanding electricity generation needs. Over the longer term, the ability to achieve the production targets will be heavily dependent on political developments. The gridlock between the parliament and the government—as well as an aversion to foreign ownership of domestic energy assets— has held back the implementation of major infrastructure projects. This has led to an emphasis on enhanced oil recovery techniques to raise output in the country's ageing fields, but its impact is clearly limited. Harnessing the help of the foreign oil majors will be essential and while the authorities recognize this, the prohibition on the foreign ownership of energy assets is expected to remain in place. The hope is that the new, more inclusive parliament will provide a fresh opportunity to push through its investment agenda. The coming months will reveal whether the new Assembly is indeed more co-operative, or whether it will resort to the obstructionism that has been a hallmark of recent Kuwaiti parliaments.
3. Cutting the number of expats
Kuwait plans to cut the number of expatriates living in the country by 1m over ten years, the social affairs and labor minister, Thekra al-Rashidi, has said. Ms Rashidi explained that the ministry will aim to lower the number of expatriates by 100,000 a year and that the ministry would stop approving invitations for foreign workers from April 1st 2014. Kuwait's four-year development plan (2010/11-2013/14) sets a target of 35% for Kuwaitis as a proportion of the total population by 2013/14. However, the Supreme Council for Planning and Development says that the proportion of Kuwaitis fell to 31.7% of the population as the number of expatriates has grown. This is in line with data from the Public Authority for Civil Information, which show that there were more than 2.6m foreigners living in Kuwait out of a total population of 3.8m as of June 30th 2012.
We believe that the measures to reduce the number of expatriates in Kuwait are unlikely to prove successful, given the large dependency of the economy on foreign labor. Only about 20% of the Kuwaiti workforce is employed in the private sector. Kuwaiti natives in general lack the education and skills to replace foreign workers, especially the pace Mr. Rashidi has envisaged seems unfeasible. The government could move closer to its target by granting more members of its stateless population, known as the bidoon, Kuwaiti nationality. In late March parliament voted to award 4,000 bidoon citizenship. The bidoon population is estimated at up to 150,000. In a broader perspective, measures to cut the number of expats are populist and unrealistic, but understandable given the fears of the government for social unrest.
Kuwait’s small and open economy is undiversified and almost fully based on oil, which is a source of financial strength but at the same time also a severe structural weakness. Kuwait holds 7% of the world’s proven oil reserves; equivalent to over 100 years of its current production levels and is now the world's fourth-largest oil exporter. Kuwait’s proven natural gas reserves are modest at just 1% of the world total. The state-managed oil sector accounts for around half of GDP, over 90% of general government revenue and 75% of total foreign currency revenues. Structural shortages of water and arable land imply that the prospects for Kuwait's manufacturing and agricultural sectors are extremely limited. The al-Sabah dynasty has been ruling the country since 1899, the current Emir, Sheik Sabah al-Ahmad al-Sabah, is head of state and wields the executive power. He appoints the government and key ministers are from the Al-Sabah family. Legislative power is held by 50 elected members of parliament (MPs) and 16 government appointed MPs. MPs have the right to pass laws and question ministers, including the Prime Minister and potentially force them to resign. This original institutional framework of 1961, that allows real effective power for elected MPs , makes Kuwait’s political system closer to a democratic regime than any of its GCC peers.