In the small harbor here, old dhow boats bounce across the water, Kuwaiti flags waving as the ships — most loaded down with fish — come crawling safely back into harbour.
Nearby, past the migrant fishermen and vast stretches of netting, the fruits of their labour are on display at the city’s fish market. Men toss fish the size of their heads — some without heads — across aisles. Women in head scarves haggle loudly. A visitor can’t be sure what makes the mind reel more — the sound or the smell.
It’s economic theory as old as time — cast your net wide, provide a stable boat for the fishermen to throw their lines, and return with a giant haul.
It can be applied to one of the country’s oldest industries — and its newest and most underdeveloped. Kuwait, after years of political infighting and lack of follow-through on economic policy, is now struggling to catch up to Gulf neighbours like the UAE and Saudi Arabia as a haven for investment.
Like the fishermen on the docks, the country’s bankers must cast wider nets. Lack of sizable foreign financial investment is a dark spot for a country whose economy has otherwise weathered economic downturn and remains stable.
Unemployment is at 2.2 percent, ranked sixteenth of all countries by the CIA World Factbook. It is the fourth-biggest oil exporter in the world, with an economy based on petroleum, petrochemicals, cement, shipbuilding, water desalination, food processing and construction materials.
But its steps towards investment growth are “very gradual compared to countries like Saudi Arabia, which has improved dramatically in last five years,” says Dr John Sfakianakis, chief economist at Banque Saudi Francais. “Kuwait it is a laggard and not a leader.”
Prime minister Sheikh Nasser Al Mohammed Al Sabah last week faced a parliamentary vote of no-confidence which could have led either to his ouster or a dissolved parliament, critically wounding Kuwait’s economic and political stability.
He survived a similar vote in 2009.
“The PM survived one of the most severe political crises that he has faced with the no confidence vote,” Sfakianakis says.
Survival or not, political instability — culminating in such high-profile events as last month’s shutdown of the Al Jazeera news bureau in Kuwait City — is a red light for investors from abroad.
They instead look to a re-energised UAE, emerging Bahrain, stable, oil-drenched Saudi or newly booming, 2022 World Cup host Qatar as the obvious GCC investment spots.
Still, “foreign investment in general has come down in the GCC because of the financial crisis, and region never part of the mainline emerging market index,” says MR Raghu, head of research at the Kuwait Finance Centre. Investors “have reduced their off index bets and started focusing on the mainline.”
Sfakianakis says Kuwait’s political instability and the government’s lack of follow-through made investors particularly nervous. It must also bulk up financial research in a region traditionally blind to its importance.
“Currently the research coverage on stocks is extremely poor,” Raghu says. “There has to be a properly regulated financial environment, market laws, excellent trading systems, plus a very good information flow and coverage for investor access. Then foreign investors would start queuing up.”
What works in oil-rich Kuwait, Sfakianakis said, are the traditional sectors.
“Oil and gas, traditional areas of hydrocarbon production and upstream and downstream industries,” and — in the homeland of Gulf retail giant MH Alshaya Co — “a little bit of retail helps the country expand. It has a growing consumer base — not as big as Saudi but it is growing.
That said, he said the country has ways to go.
“They’re pretty far away, and it will take a lot of political stability for Kuwait to attract the same amount of money that the UAE and Saudi have been attracting for the past five years,” he says. “They really have to do a lot.”
Raghu said Kuwait must also lift the ceiling on foreign investment that stymies many Gulf countries – “there are limits on how much a foreigner can buy.”
In Saudi, they have to buy into the market indirectly, through swaps. Raghu estimated a 49 percent roof for Kuwaiti banks.
In 2009, the Kuwaitis introduced an economic development plan pledging to spend $140bn in the next five years in order to attract investment, diversify its economy beyond oil, and boost participation from the private sector.
Details, an exact timeline and inner workings of the plan have not been discussed by the government, leading investors to worry about its ability to follow through.
“They have announced the investment programme but there is lack of clarity as to how the money will be invested, what will be the role of local banks and what amount of the investments they’ve outlines for the next few years will be underwritten by the state,” Sfakianakis says.
As of 2009, its investment rank was a dismal 141st globally, making up 13.9 percent of its $148bn-a-year GDP.
Investors lack confidence in a country which has been experiencing extreme political and socioeconomic instability fluctuations going back to Iraq’s invasion in 1991 — and even before.
“Kuwait does go through periods of extreme political instability and [affects] its ability to push ahead with development projects,” Sfakianakis says. “When an international investor looks at the country, they look at it with a high degree of risk. It still possesses high degree of risk and that has to do with the inability of the political system to deliver on proposed economic projects and promises.”
There’s a legacy of fighting between the National Assembly and the executive branch, putting a halt to most attempts at economic reform and keeping Kuwait from advancing and diversifying its economy.
“Political instability in terms of, ‘how is the government effective’ and ‘is the government effective enough on the economy’ is a concern,” Sfakianakis says. “It has an impact on the amount of money that the country can attract from the region or outside, so it’s not surprising that Kuwait has one of the lowest FDI numbers for a consecutive number of years, compared to other countries in the GCC.”
In order to attract the foreign sector, Kuwait has focused its short-term efforts on investing its own money into building a stronger economic infrastructure.
In April the government’s billion-dollar-plus economic plan went into effect, backed 50 percent by the government and the rest by local investors.
The local Arabic Al Jarida newspaper said at the time that the government had decided that Kuwaiti banks — not named but likely including the larger state holdings National Bank of Kuwait and Burgan Bank — would finance the plan with a backup guarantee by state deposits.
Despite the money, which will go into improving infrastructure and raising the production of oil and natural gas, the country likely won’t see an immediate surge.
“I don’t foresee any change in the next six months in the investment appetite,” Sfakianakis says. “I think it will be business as usual — they’ll get some money, but it’s not going to be anything to call home about. The numbers will be below their potential — that should be a wake up call for the political class in Kuwait to do something about Kuwait itself and its appearance in the international community.”
Oil-rich Kuwait’s natural assets could be its biggest lure in fishing for foreign business. But it must find a way to capitalise on those attributes.
“It’s a growing economy with a solid hydrocarbon base and it’s a very important participant in OPEC and the global oil market,” he said. “It’s a shame to see Kuwait’s potential going to the wayside. They’re operating at sub-optimal levels and they could easily reach optimality by taking the right steps. They have a lot to gain if they face challenges that are political in nature and not economic.”
True that foreign investment is being made in other ways. In 2009, 60 percent of Kuwait’s labour force was made up of immigrants. Walk through the streets of downtown Kuwait City and you’ll see Filipino workers at Starbucks and Gloria Jean’s Coffees. Its unemployment rate is only 2.2 percent, sixteenth in the world. At the lavish Souk Sharq mall, major Kuwaiti businesses like MH Alshaya Co have licensed major Western brands like Debenhams and Swedish clothing giant H&M.
But while workers see opportunity in Kuwait’s emerging retail economy, major investors from outside the GCC are still loathe putting their money into a country whose parliament and prime minister are notorious for their infighting.
Within the Gulf, neighbours contribute — Saudi Arabia, the UAE and Qatar are Kuwait’s biggest investors. Kuwait also invests in banks abroad, with some returning to Kuwait in the form of FDI.
Raghu says Kuwait’s stock market — the oldest in the region — has gone through cycles and its investors “have become more mature.” But he cautioned that it’s not a deep market — “so while you have a lot of stocks listed, most are small caps and micro-caps. There’s not many good family businesses being represented and liquidity has come down and been extremely poor.”
Looking to the coming year, Kuwait is starting to establish itself abroad. Other banks could follow the model of the Kuwait Finance House, which has arms in Turkey and Malaysia as well as Bahrain, the latter overseeing a $50m investment bank in Jordan.
Oil and gas, traditional areas of hydrocarbon production and upstream and downstream industries and a growing retail consumer base will also see growth.
And in Kuwait’s favour, it is the only GCC country boasting a derivative-driven stock market. “It has an exchange-traded option which is unique in the GCC,” he says. “It could also do well by bringing new companies to the market through privatisation, which would make it a very interesting market to look at. We could see an attractive growth.”
But “they’re pretty far away, and it will take a lot of political ability for Kuwait to attract the same amount of money as the UAE and Saudi,” Sfakianakis says.
“It’s consistency and political resolve, as well as taking the steps to making Kuwait a more business-friendly environment.”
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.