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ANALYSIS

‘Politics, oil poison Kuwait economy’

Kuwait, November 15, 2012

To gauge the impact of Kuwait's political deadlock on its economy, access the Internet with a fixed-line broadband connection. The line is slow, very slow - half the speed of a connection in other wealthy Gulf Arab states, said a top official.

The Ministry of Communications owns and operates the country's fixed-line infrastructure, with the four major Internet service providers paying the government to use it.

But the largely copper-based network cannot carry enough bandwidth to satisfy consumer demand, according to Essa Al-Kooheji, general manager at Qualitynet, which has an estimated 45 percent market share for fixed-line Internet.

Only about 15 percent of fixed-line broadband connections in the country use faster fibre optic lines, which are relatively common elsewhere in the Gulf, Kooheji said.

"We receive lots of calls from customers who want to upgrade and take the maximum speed for the price available, but they cannot do so," he told Reuters in September. "The government should put more effort into improving the telecom infrastructure rather than cutting prices."

For many businessmen, Kuwait is a frustrating contradiction: a fabulously rich country which is economically backward. And the gap between its wealth and its level of development appears to be widening.

As the country's political tensions have worsened in the last several months, prompting authorities to dissolve parliament and call snap elections for Dec. 1, businessmen have increasingly worried that the political system has become unable to address the economic problems.

A chorus of executives has publicly criticised the government's economic management, a rare phenomenon in a region where the business community prefers to lobby authorities discretely behind the scenes.

Kuwait's oil wealth gives the country of about 3.7 million people, including 1.2 million Kuwaiti citizens, a per capita gross national income of about $50,000, among the ten highest in the world and the second highest in the Gulf after Qatar.

But its creaking infrastructure, unfriendly business climate and near-total dependence on oil put Kuwait at a much lower level in terms of the sophistication and dynamism of its economy - especially compared to its Gulf neighbours, which are working harder to upgrade their infrastructure and diversify their economies through private sector investment.

"Kuwait's economy needs upgrading and investment, from the upstream wells to the refineries, from basic infrastructure to healthcare," said Farouk Soussa, Middle East chief economist at Citigroup in Dubai.

Unfinished buildings dot the skyline, with piles of rubble and trash left uncleared in residential areas for months on end, sometimes because of disputes over land ownership. Bureaucracy for licences and other official paperwork is painfully slow and can usually only be done in person or by fax, which remains a popular method of communication between institutions, rather than the Internet.

"Kuwait has one of the highest GDPs in the world but the roads have potholes, there are traffic jams and the airport is in an unacceptable state, with the arriving passengers mingling with those departing," said a diplomat in Kuwait, declining to be named because of the political sensitivity of his remarks.

Politics

Much of Kuwait's economic backwardness stems from its politics. In the last several years tensions have risen between the cabinet, which is led by a prime minister appointed by the 83-year-old emir, and a parliament which is the freest and most assertive among Gulf Arab states.

Constant conflict between the two camps has disrupted parliamentary business, caused eight changes of government in six years, and embroiled economic policy-making in accusations of incompetence and corruption.

This has stalled approval and implementation of major parts of a 30 billion dinar ($107 billion) economic development scheme announced in late 2010, including plans to build a new refinery, airport and hospitals.

In 2004, capital expenditure by Kuwait's government was about 4 percent of gross domestic product, just above Saudi Arabia's level, according to credit rating agency Fitch.

Since 2004, other Gulf governments have started pouring tens of billions of additional dollars into transport systems, new industries and high technology; Saudi Arabia's capital expenditure has shot up to around 13 percent of GDP. Kuwait's has edged up only slightly, to a little above 5 percent, according to Fitch, which warned last month that Kuwait could lose its AA rating because of its political problems.

Ibrahim Dabdoub, chief executive of National Bank of Kuwait (NBK), the country's top bank, publicly blamed the government's failure to go ahead with infrastructure plans for a surprise 42 percent drop in the bank's second-quarter profit.

"Domestically, a negative outlook is inevitable where government spending remains dormant, tendering of new projects significantly lags and asset values continue contracting as the local stock market considerably underperforms," he said in July.

Kuwait's malaise runs deeper than politics, however; its heavy dependence on oil seems to have crippled other parts of the economy. Oil accounts for over 90 percent of state budget revenues, a high level even by Gulf standards.

Countries such as Saudi Arabia, which must find jobs for a sizeable population of over 18 million citizens, and the United Arab Emirates, which contains the freewheeling trade hub of Dubai, have strong incentives to create vibrant private sectors by improving business regulation and cutting red tape.

But Kuwait's oil wealth is so big that it has prospered while ignoring the private sector. This limits the immediate pressure for it to develop a business-friendly environment.

Kuwait comes 82nd on the World Bank's ranking of countries for doing business, by far the lowest level among the wealthy Gulf Arab oil exporters. It is easier to do deals in much poorer countries such as Botswana and Belarus, according to the study.

The country drew just $399 million in foreign direct investment in 2011, or 1.5 percent of the total in the six-nation Gulf Cooperation Council total, data from the United Nations Conference on Trade and Development show. Kuwait is home to about 6.2 percent of the GCC's inhabitants.

In a rare open letter to the prime minister in September, the al-Qabas newspaper, one of Kuwait's main papers, described the country as a fallen role model for the Gulf which had "failed to keep up with the latest advancements" and was "in a state of complete paralysis".

Outlook

Soussa at Citigroup said a huge amount of pent-up demand for investment had built up in Kuwait and that "some sort of political breakthrough" was required to unleash it. There is little evidence to suggest a breakthrough is imminent, however.

The December elections may well produce another parliament determined to confront the cabinet; if controversial voting rule changes announced last month create a more malleable parliament, street protests and legislative boycotts by the opposition may still make governing difficult.

While oil prices stay high, Kuwait can limp along. According to forecasts by Fitch, its economy will grow just 2.3 percent next year, the slowest rate among the rich Gulf Arab oil exporters - but because of oil, it will enjoy the highest state budget and current account trade surpluses, at 22.9 percent and 37.0 percent of gross domestic product.

The country's oil reserves are among the cheapest in the world to exploit, so global oil prices would have to be much lower to put state finances in any danger. Kuwait could have balanced its budget with an oil price of just $44 per barrel last fiscal year, the International Monetary Fund estimated.

Even if it started posting budget deficits, the country could live on its savings for many years. Its sovereign wealth fund, Kuwait Investment Authority, is believed to hold well over $300 billion of assets around the world; government spending this fiscal year is officially projected at $76 billion.

But Kuwait may fall further behind its Gulf neighbours in terms of attracting investment and developing its private sector, as foreign businessmen stay away and local firms focus on opportunities overseas.

NBK, for example, said it aimed to earn 50 percent of its profits from overseas branches by 2020, up from 29 percent now.

And if oil prices fall over the long term, Kuwait will eventually become vulnerable if it does not have a solid private sector economy to fall back on - especially if political tensions pressure the government into continuing to increase public sector wages and social welfare in coming years.

"The country is now at a crossroads as regards conserving wealth for its future generations," the IMF warned in a June report, urging Kuwait to spend more on infrastructure and reform business regulation to create more jobs. – Reuters




Tags: economy | Telecom | Oil | Kuwait | Internet | Politics |

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