Kuwait Defence and Security Report Q3 2009

The economic outlook for Kuwait continues to deteriorate. We expect the expatriate population to shrink as jobs go (reducing the number of consumers), while personal wealth will contract in line with stock market and real estate asset losses. The government stimulus package will go some way towards keeping the economy afloat - in line with the view we have been promoting for a while for the whole of the Gulf region - but, nonetheless, we expect the economy to contract by 1.0% this year, and recover only slowly going forward as the unappealing business and political environments keep investors away.

The Kuwaiti government is under continuing pressure to deal with the economic turmoil and, as parliament becomes even more angry with the government, this could lead the latter to make some potentially damaging decisions. New polls are not due until 2012, but Kuwait has a history of dissolving governments and there is also a risk of early elections. It has had four parliamentary elections since 1999, and we would not be surprised to see new polls called in 2009 or 2010. This should not result in any meaningful change of government - parliament is already dominated by the opposition, and the royal family is not about to be overthrown - but it could destabilise the country, delay reforms, deter investors and lead to even further fiscal laxity.

Kuwait is likely to continue to rely upon foreign sources for arms and equipment in the foreseeable future. The West has interest in Kuwait due to its geo-strategic position and pro-Western outlook. This has allowed Kuwait to receive large quantities of advanced high-technology weapons systems from some major supplier countries such as the US, the UK and France. Kuwait lacks an indigenous defence industry of significance, and its armed forces are almost entirely reliant upon procurements from foreign sources for equipment and training. US foreign military assistance will continue to dominate Kuwait's imports trade, with the vast majority of its arms procurements being supplied by US-based companies. Kuwait has opened discussions with France over the procurement of military materials and the development of Kuwait's nuclear energy sector. Kuwait is also increasing its regional security ties, and recently entered into discussions with Bahrain.

We have retained our projection that defence spending will likely grow at 5% annually, in real terms, over the coming years. We expect that defence spending will also grow as a proportion of GDP, reaching 1.8% of GDP by 2012. These increases will depend in large part on how the economy responds in the face of the global financial crisis and the downturn in oil prices.

This quarter, we have introduced a significant new aspect to BMI's Defence Reports, which is the City Terrorism Rating (CTR). This assesses the risk of a terrorist attack. The CTR takes into account the overall BMI Terrorism Rating for the country in question. It also incorporates the 'prevalence' of terrorism, which recognises the frequency of attacks, and whether the city is a target for terrorists. The CTR also recognises the 'threat' of terrorism in terms of the likely numbers of victims and the ability of groups to launch sustained campaigns. In Kuwait, we assess the CTR of Kuwait City at 87.5, which ranks it fifth in the Middle East region's 23 cities, behind Tripoli, Damascus, Dubai and Abu Dhabi.