RaboResearch - Economic Research

Country Report Kuwait

Country Report


The growth of Kuwait’s hydrocarbon dependent economy slowed further in 2014, as oil prices slumped. Stimulating development of the non-oil sector requires reforms that will be difficult to pass, especially if they come at a cost of welfare programmes. Meanwhile, the political situation eased somewhat as the current parliament is proving more cooperative.

Strengths (+) and weaknesses (-)

(+)      Strong external and fiscal position

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 position is very strong.

(-)       Policy stasis due to a dysfunctional political system

Government and parliament derive their authority from different sources, as the government is appointed by the ruling family, while the majority of parliament is elected. Continuous clashes between the two have resulted in a political deadlock and policy stasis.

(-)       High dependency on oil

The hydrocarbon sector accounts for 63% of GDP, generates 94% of total exports and 82% of total government revenues. Hence, Kuwait is highly susceptible to volatile global oil markets. Kuwait’s low fiscal breakeven oil price (IMF estimate is USD 70 per barrel) is above current prices.

(-)       Susceptibility to sectarian violence

While the majority of Muslims in Kuwait are Sunni (60-70%), the country also hosts a significant Shia community and could therefore be prone to sectarian conflict related to this division. The fact that Shia’s are well represented in business and politics serves as a mitigant. 

Key developments

1. Adverse effects from the oil price decline

Kuwait remains very dependent on oil, with the oil-sector comprising nearly 60% of GDP in 2014 and about 94% of export revenue back in October 2014. The sharp decline of the oil price since then (figure 1) has reduced this figure to around 80% of GDP. This reduction in production and prices has negatively affected GDP growth causing the real oil GDP to be stagnant in 2014. In 2014, the non-oil growth sector grew by an estimated 3.5 percent from 2.8 percent in 2013, as domestic consumption continued to grow coupled with a modest pick-up in government capital spending and private investment. In 2015, the economy is likely to grow by about 1.8%, as the non-oil growth is expected to stay relatively high, while growth in the oil sector will be weak or negative. Non-oil growth could take a hit due if the government decided to reduce spending (growth).

Figure 1: Oil prices decline sharply
Figure 1: Oil prices decline sharplySource: Macrobond
Figure 2: GDP growth subdued
Figure 2: GDP growth subduedSource: EIU

The oil price decline has also led to a significant worsening of the government balance, which is projected to deteriorate from 25.8% of GDP in 2013 to 4.6% of GDP in 2015. While the Kuwaiti government also receives sizeable revenues in investment income, the sudden deterioration of income may force the government to downwardly adjust its spending. In recent years spend-ing has increased quickly as the  government has attempted to soothe protests in the wake of the Arab Spring. The country has taken the first step by raising the heavily subsidized fuel prices by 50%. However Kuwait will use some of its accumulated wealth to cushion the impact of low oil prices.

2. Reform needed but difficult

To further promote (non-oil) growth it is necessary to improve of the attractiveness of Kuwait for international investors and boost competitiveness. Kuwait formalized its ambition to become a regional trade and financial hub in a new five-year Development Plan (DP, 2015–19), which was passed by parliament recently, despite facing heavy criticism as the previous plan was executed with substantial delays. The new plan envisages a number of large infrastructural projects including a railway network, a subway network and a large refinery. This will require an increase in public investment. However, the long-running gridlock between the royal family and the opposition, as well as within the royal family itself, may make it very difficult to increase capital spending and implement economic reforms aimed at developing the private sector, and may also limit oil-sector development. So far, the parliament has prioritized populist measures, such as public-sector pay rises and writing off citizens' debts, at the expense of economic reforms and this trend is likely to continue. Next to infrastructure investment, the government needs to work on the business environment. Contracts between foreign companies and the Kuwaiti government face high risks of delays and outright cancellation. Kuwait still ranks only 131st in the world in terms of enforcing contracts and 86th in the overall World Bank’s doing business ranking. This may in part explain the chronically low level of foreign direct investment (FDI) inflows (around 1% of GDP), though resource nationalism and hesitation to allow foreign firms in certain sectors also act as impediments.

3. International and domestic political situation stabilised.

Kuwait’s political relations with Iraq remain rocky as territorial disputes, e.g. those in relation to the Kuwaiti Mubarak al-Kabeer Port and the Iraqi Al-Faw Port expansion, create tensions that occasionally result in military deployments or the detention of fishermen. However, Iraq has significantly improved relations with Kuwait by resolving the ongoing dispute over Iraqi debts to Kuwait relating to the Gulf War of 1990–91 and the risk of an outright military confrontation is low. Kuwait’s relations with Iran have also improved markedly since the election of the more centrist President Hassan Rowhani in 2013. Moreover, a rapprochement between Iran and the US, a long-time Kuwaiti ally, in the form of a nuclear agreement could lead to further improvement.

After a long period of political instability, in which there was strong opposition in parliament to the al Sabah family’s dominance of the government, the current parliament is more cooperative than previous parliaments. However, the continued presence of members who are less supportive of government policy, or the al Sabah’s rule, will continue to prove disruptive. With the prime minister’s popularity appearing to wane gradually, lawmakers will continue to pursue interrogation requests to undermine the al Sabah family’s dominance of the cabinet. Outside the parliament, divisions are becoming apparent as the family members of al Sabah are positioning themselves to become the next crown prince. This is unlikely to threaten the family’s dominance but as each faction of the family has allies in parliament that it uses to block legislation sponsored by rivals and corruption allegations are used to discredit MPs and senior officials, reforming the system will be difficult.

Factsheet of Kuwait
Factsheet of KuwaitSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank. 

Background information

Kuwait’s small and open economy is undiversified and almost fully based on the oil sector, which is a source of financial strength, but also a severe structural weakness. Kuwait holds the sixth-largest proven oil reserves in the world, enough to sustain current production of 3m bpd for 90 years. Kuwait is the world's eighth-largest oil producer. The oil sector is managed by the state and the degree of state intervention in general is high. Structural shortages of water and arable land imply that the prospects for Kuwait's manufacturing and agricultural sectors are extremely limited. 98% of the population lives in the cities and 69% of it consists of immigrants, which make up 80% of the labour force. High wages and favourable working conditions keep Kuwaiti nationals working in the public sector, where they account for 80% of employment. The private sector relies on immigrant labour workforce (95% of employment). The disparities in income and working conditions between Kuwaiti´s and immigrants are large. Kuwait also hosts 106,000 stateless Arabs, called bidoons, that do not have citizenship and do not enjoy the same benefits as nationals. The al-Sabah dynasty has been ruling the country since 1899. The current Emir is head of state and wields 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. Political parties are prohibited, so MPs are independents. The original institutional framework of 1961 allows real effective power for elected MPs, making Kuwait’s political system the most democratic regime among the GCC. The US is an important ally and Kuwait is part of the Gulf Cooperation Council which also has a military branch called the Peninsula Shield Force.

Economic indicators of Kuwait
Economic indicators of KuwaitSource: EIU
Jurriaan Kalf
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 88 726 7864

naar boven