Kuwait Business Forecast Report Q4 2008

Overall Stability But Structural Weaknesses Remain

Could the honeymoon period be over for the Gulf? As we went to press, oil prices had fallen by around US$30/bbl compared with their July high, inflation remained at record levels and speculation had increased over the possibility of a US/Israeli strike on Iran. We think Kuwait will be buffeted by its still growing oil and gas sector, as well as strong government spending. However, with FDI flows poor by regional standards, and ongoing negative developments in the business environment, there are still major structural weaknesses. Our short-term economic rating has fallen sharply to 76.0 (from 88.0), on the back of a rise in our inflation projections.

Politically, Kuwait remains stable, by and large. However, in terms of the government's ability to design and implement policy, there are a number of risks, including the populist parliament, which has stood in the way of various pro-investment policies, an increasingly restive immigrant population, and a serious inflation problem. All of these will constrain the outlook for privatisation and other reforms. Externally, there are problems too: a US or Israeli strike on Iran could hurt Kuwait through a rise in regional risk perceptions, the potential closure of the Straits of Hormuz and/or a domestic Shi'a rebellion.

On the economic front, Kuwait is in the fortunate position of having an ample and still expanding oil and gas sector, although on the downside, this does allow parliamentarians to be more populist and less business-friendly. Oil production is forecast to rise from 2.65mn b/d in 2008 to 3.00mn b/d in 2012, while natural gas will see an even more stellar rate of growth, from 13.6bcm to 20.4bcm over the same period. In spite of this real growth, however, revenues will fall with oil prices: we see the OPEC Basket average dropping from US$121.50/bbl in 2008 to US$81.50/bbl by 2012.

Kuwait is far and away the worst performing GCC state in terms of FDI, with inflows coming in at 0.7% of GFCF and FDI stock at 0.8% of GDP in 2006, according to UNCTAD. Central Bank of Kuwait balance of payments data for 2007 show little has improved, with inward investment totalling just KWD34mn (US$119mn). The explanation, in our view lies in the business environment ratings: Kuwait is also the lowest scoring in this category, with a rating of 50.5. For us, nothing tells the story better than the comments of Dr Saad Al Barrak, CEO of Kuwait's flagship telecoms company Zain, who told the newspaper al-Rai last year that he was moving his operations to Bahrain because 'the Kuwaiti business environment repels investment and the country's laws are not good for a financial hub'.