Kuwait's financial outlook: Money to burn

Kuwait’s outlook is positive as oil prices are tipped to boost government spending and private consumption
Kuwait's financial outlook: Money to burn
By Elizabeth Broomhall
Sat 25 Feb 2012 08:54 PM

The year 2011 was tough for a large part of the Middle East. Burdened with the Arab Spring protests and fearful of the impact of the sovereign debt crisis in Europe, many countries have struggled to bounce back from the 2009 recession in the way they had hoped.

As one of the richest countries in the world, the Gulf state of Kuwait has mostly managed to hold its own throughout the economic and political turbulence of recent years. Thought it was hit hard by the global financial crisis, seeing a sharp drop in GDP growth and real estate transactions, in 2010-2011 it boasted a healthy budget surplus for the twelfth year running, and in the first months of 2012, began to see an upturn across several sectors.

Shielded from the regional unrest due to the high wages and extravagant lifestyles bestowed on its citizens, Kuwait, along with the rest of its Gulf neighbours, has also managed to avoid a mass revolution or civil war. Protestors in many parts of the region would give much to have the levels of democracy that Kuwait has now, but it’s also true to note that the process has been in crisis for years now.

Kuwait has by far the most liberal political environment in the Gulf, but the ‘democratic experiment’ has not gone according to plan. As it stands right now, it’s even possible to argue that the elected parliament has been a millstone round the neck of potential development. Debate is fair and free, but the tendency of some parliamentary members to carefully protect their own constituencies, whether these are tribal or relating to business, has seen some national projects face a standstill.

Perhaps unsurprisingly, the democratic process in Kuwait has been extremely gradual and slow. But the country’s 1962 constitution — which remains unamended — provided for, amongst other things, an elected parliament that was expected to have some real clout. Since that time, however, the delegation of powers away from the ruling Al Sabah family has been painful, with the king opting to suspend two parliaments in 1976 and 1986.

The 1990s saw far more positive change, especially following the period of national unity engendered after the first Gulf War and the ejection of Iraq from Kuwait. The US applied pressure in the country’s push towards democracy, and the parliament was reconstituted in 1992. Even so, women’s suffrage was only granted in 2005.

But on the face of it, the House of the Nation, as the parliament is known, currently looks quite healthy. Its 50 members are mostly made up of independents, liberals or Islamists (actual political parties are banned, somewhat bizarrely). The country’s former prime minister, Sheikh Nasser Mohammed Al Ahmed Al Sabah, was the subject of frequent and robust criticism, and only escaped a parliamentary “grilling” in 2008 due to a cabinet reshuffle. After quitting his position in November last year, he has been replaced by Sheikh Jaber Al Mubarak Al Sabah — who was last week again threatened with grilling, despite the new government only having been in place for a matter of days.

That level of accountability is still some way distant elsewhere in parts of the Middle East, to say the least. As a result, Kuwait is one of only three nations in the Middle East and North Africa region — alongside Lebanon and Morocco — that rate as ‘partly free’ as opposed to ‘not free’ on the independent Freedom House ‘Freedom in the World 2011’ report. The liberal outlook has other benefits as well.

“In October 2009, over 700 expatriate construction workers protested inhumane work and living conditions, as well as overdue salaries,” last year’s Freedom House report noted. “Workers also claimed they had not been paid for overtime in a year. Kuwaiti authorities responded favourably, compelling employers to remedy the situation or face stiff fines.”

Despite problems related to corruption allegations within the government, the internal political situation in Kuwait also now seems to be getting back on track, with elections for a new parliament due in early spring. Subsequently, analysts are forecasting a positive year ahead for the country.

In euro terms, oil prices are now close to their mid-2008 highs, which is good news for countries such as Kuwait where the oil sector has averaged around 53 percent of the country’s GDP for the last five years, according to a report by QNB Capital. Experts at the National Bank of Kuwait (NBK) say 2011 was in fact a record year for oil prices, with brent averaging $111.2 per barrel — its highest ever value and a 40 rise on 2010 figures.

According to NBK’s most recent economic brief, prices of crude dropped in mid-December, but jumped up again in early January due to the ongoing tensions with Iran and concerns that the state could disrupt oil trade through the Strait of Hormuz. The report adds that the increase came in spite “of an increase in the value of the dollar against the euro, which would normally be bearish for crude.”

The consequences of the high oil prices for Kuwait, in addition to a positive outlook for demand and supply in the year ahead, are significant. QNB’s outlook is that “high oil prices will lead a record fiscal revenue of $92.9bn for the fiscal year 2011-2012”, whilst NBK is forecasting an even higher income of $98.8bn. The report adds that if government spending comes in at five to ten percent below the government’s forecast (as NBK expects), the budget could see a surplus of between KD8.5bn and KD10.5bn before allocations to the Reserve Fund for Future generations. “This is KD3-5bn higher than last year’s surplus, and would represent Kuwait’s thirteenth successive budget surplus.”

In 2012, QNB says high oil prices — which are expected to near $100 a barrel throughout the year — will lift nominal GDP in the country by one percent to $167bn.

On the back of high oil prices and large country revenues, experts believe heavy government spending will continue, and in turn, have a positive impact on private consumption. A consumer outlook report for the year by BMI says this will be boosted by a growth in urbanisation, busy lifestyles and working women. Whilst almost 99 percent of the population is expected to be classified as urban by 2015, rising levels of employment will increase the disposable incomes among families, it says. In the next three years, BMI predicts that the value of the retail segment will rise by 43.1 percent, from KD2.27bn ($8.45bn) in 2011 to KD3.25bn ($12.09bn).

As for inflation, NBK reports that the consumer price index saw figures rise to 4.8 percent year-on-year in October 2011, with the biggest source of upward pressure being food price increases. The cost of food in Kuwait, which is heavily influenced by international factors, soared by 9.9 percent year on year for October, with the biggest pressure coming from meat, fish and dining out, while other foodstuffs, such as vegetables, only rose by 1.1 percent. Household goods and services saw a 4.6 percent price hike, up 4.6 percent in 2011 compared with 2010, whilst transport and communication rose 2.9 percent.

“Kuwait imports most of its food from abroad, which leaves it vulnerable to inflationary pressures arising from the spikes in global food prices,” says the BMI report. “At the beginning of the financial year 2011-2012, the government announced a 30 percent increase in public spending, much of which was allocated to food subsidisation, which helped offset some of the inflationary pressure.”

Going forward, BMI predicts that inflation as a whole will drop to five percent, whilst NBK expects levels to fall from 4.7 percent, to 4.4 percent in 2012, as food prices ease further down the road. “Despite an increase in inflation rate for October,” says NBK, “we expect the inflation rate to come down in the following months, and be lower for 2012.”

Though Kuwait’s real estate sector took a hit in the wake of the global financial crisis, recent increases in transactions in addition to huge government spending initiatives are seen as signs that the property market could get back on track in the year ahead.

A January report by NBK showed that real estate purchases surged 35 percent in 2011, hitting KD2.7bn ($9.71bn) and with a renewed interest among investors. “The real estate sector recovered further in 2011, with special sustained interest in the investment sector, (ie) apartment buildings that generate income,” said the report. “For the year, the total value of real estate sales was up 35 percent in 2011 over 2010. The leading segment — the investment sector — was up 53 percent.”

Loans to real estate also showed some improvement, the report said, a further sign that the property market was looking up. “Outside of household finance, loans to real estate showed some improvement and grew a decent 4.8 percent year on year, probably reflecting the pickup in investment real estate sales throughout 2011.”

As for Kuwait project portfolio, 2012 is likely to be a year of growth as the government’s development plan for 2010-2014 gets underway. Official figures say an estimated $125bn was a allocated for oil and non-oil projects, with a total of 1,100 developments planned during the four-year period. Within the plans are a range of hard and soft infrastructure developments, business, residential and tourism projects, not to mention plans to enhance the Gulf state’s oil production capacity and modernise existing facilities. The biggest projects include a new business hub known as Silk City, a national railway and metro system, a major container harbour and 25km causeway, and a new passenger terminal for Kuwait International Airport. Others include development of Kuwait’s Bubiyan and Failaka Islands, and a spate of satellite cities and towns in the outlying regions such as Subiya, Khairan, Jaber Al Ahmed City and Arifjan. For oil and gas projects, data shows that more than $125bn is to be invested.

Whilst the outlook for Kuwait in 2012 is mainly positive one, there remain some ongoing risks to its robust economy and growth in the year ahead, which experts say the country needs to watch out for going forward. According to BMI, one is the potential for deterioration of Kuwait’s domestic political environment, which could have serious implications for the country by disrupting economic activity, and another is the worsening prospects for the global economy, which could impact Kuwait through falling energy prices and/or demand for oil, hindering the government’s ability to finance its portfolio of projects. That said, experts remain largely optimistic about the future, especially in view of the country’s huge budget surplus, which will no doubt give it plenty of room for manoeuvre.

Kuwait’s $7bn Metro gets green light

Kuwait is pushing ahead with its new metro rail system, with the company in charge of building the first phase of the project announcing that it will begin procurement “shortly”.

Construction of the 160km Kuwait Metropolitan Rapid Transit System Project (KMRT), which will have 69 stations on three lines, is worth an estimated $7bn.

According to a statement provided by the Partnerships Technical Bureau (PTB), a government committee recently signed off the feasibility study into the metro.

That study, which was conducted by Ernst & Young, Ashurst and Atkins, covered the railway’s procurement stage, including infrastructure, control systems, rolling stock, depot and operations.

As a result, PTB said it would “shortly” be issuing an expression of interest for the procurement of the Integrated Rolling Stock and Systems PPP Company.

That firm will provide rolling stock and systems for all five phases of the metro.

PTB is currently focusing on the first phase of the project, which will include around 50km of rail, with 28 new stations, 30 percent of which will be underground.

No timeline has been given for the start of construction on the project, or the eventual finish. However, last year, a local businessman said that work could start in 2013.

The GCC states are individually planning cross-country railway systems that will eventually link to create an entire infrastructure across the six states.

The first train on the UAE’s Shah Habshan-Ruwais railway will start running in around 2013, while Qatar is pushing ahead with plans to build a metro system in Doha.

Kuwait market regulator orders nine firms to delist

Kuwait’s Capital Market Authority (CMA) has ordered nine listed companies, including the co-owner of Aston Martin, to be removed from the stock exchange.

Most firms to be delisted are investment companies that have struggled to meet debt obligations since the global financial crisis and their shares have been suspended for failing to report earnings on time.

Investment Dar, which brought half of Aston Martin for £479m ($751.7m) in 2007, is among those to be delisted, according to a statement carried by the state news agency.

The firm secured a KD1bn ($3.6bn) debt deal with creditors in February 2011 but has not traded on the exchange since April 2009.

Investment Dar declined to comment but a spokesperson said the company would issue a statement in the coming days.

International Investment Group, which defaulted on a $200m Islamic bond in April 2010, is another ordered to delist.

“It gives a better reflection of the index, given that most of these companies have been halted for a while and investors got used to not trading them,” said Jasem Al Zeraei, head of institutional sales at NBK Capital.

“However, it’s negative for the shareholders in these companies who don’t have the hope anymore of these companies trading again.”

A further nine investment firms were also issued with an ultimatum by the CMA to correct their financial positions by 31 March or be delisted, the statement added.

KFH reports strong increase in revenues

Kuwait Finance House (KFH) chairman Samir Al Nafisi announced that the bank achieved total revenues of KD872.1m ($3.13bn) for the fiscal year 2011 with an increase of KD135.8m ($488.7m) and 18.4 percent over last year, and total profit for the same year reached KD234.8m ($844.97m), including profits for investment depositors that reached KD152.7m ($549.51m).

The profits will be distributed as follows: 1.920 percent for “Al Khumasiya” investment deposit, 1.728 percent for “Al Mustamera” continuous investment deposit, 1.344 percent for “Al Sedra” deposit, and 1.152 percent for “Tawfeer” saving investment accounts. Shareholders’ net profit reached KD80.3 m, and earnings per share reached 30.2 fils. In addition, the board of directors recommended granting shareholders fifteen percent cash dividends and eight percent bonus shares subject to the approval of the general assembly and regulatory authorities. Total Assets increased to KD13.5bn with and an increase of KD912m and 7.3 percent over last year, while deposits increased to KD8.9bn with an increase of KD1.2bn and 16.1 percent more than last year.

Al Nafisi mentioned that this success was achieved through prioritising international standards in quality of assets, which cemented financial performance in light of the developments that local and global markets had gone through.

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