Politics hinder effort to reshape Kuwait's economy

Reuters, Wednesday 7 Sep 2011

The weakening of crude prices in the last few months and a softening global economy seem be ringing alarm bells in the world's sixth biggest oil exporter. But conflict between cabinet and parliament may block change

Calls by Kuwait's top policymakers to correct imbalances in the economy and cut budget waste may signal new resolve to push ahead with long-delayed diversification plans. But conflict between the cabinet and parliament, long a headache for anyone trying to get things done in Kuwait, may block the effort.

Kuwait, with 3.6 million people, depends on income from crude oil for around 93 per cent of its government budget, the most among oil-exporting Gulf countries. Despite its wealth, the state-dominated economy has drawn few foreign investors, unlike neighbours such as Qatar and the United Arab Emirates.

In 2009, the US$133 billion economy nosedived into an estimated contraction of 5.0 per cent in real terms, the most severe in the Gulf, after the global financial crisis slashed oil prices to as low as $36 per barrel.

So a weakening of crude prices in the last several months and a softening global economy seem to have rung alarm bells in the world's sixth biggest oil exporter.

Kuwait's Emir Sheikh Sabah al-Ahmad al-Sabah said last month that a misuse of budget surpluses and "irresponsible consumer waste" had deepened structural imbalances and distortions in the economy, and must be fixed.

He told the first meeting of an advisory committee set up to see how Kuwait should tackle local and global economic challenges that not investing in the right direction threatened the country's finances and growth.

"It might signal an awareness and a decision taken at a senior level to push in this direction," said Fabio Scacciavillani, chief economist at Oman Investment Fund.

"Risks of global recession are increasing. We know that most likely the second part of 2011 will be much weaker than expected, potentially leading into global recession."

Central bank governor Sheikh Salem Abdul-Aziz al-Sabah said in July that the cabinet needed to boost capital spending and support the private sector to overcome a "one-sided" dependence on oil revenue and the government's control of all sectors.

Kuwait's parliament cleared a $110 billion, four-year development plan in February 2010, aiming to diversify away from oil and boost the private sector, which accounts for only a quarter of economic output.

But more than a year later, the country's first such plan since 1986 is still mostly on paper after political conflicts paralysed the government.

The government has approved several projects under the plan, the latest of which is a long-delayed 4 billion dinar ($14.7 billion) oil refinery, but key steps have not been taken on most of those projects and it is still not clear when building of the refinery will start.

Analysts say an important factor behind the delays is long-running tensions between parliament and a government dominated by the ruling al-Sabah family.

Parliament, the most outspoken in a region dominated by autocratic rulers, has triggered numerous cabinet resignations and reshuffles. The current government is Sheikh Nasser al-Mohammad al-Sabah's seventh since he was appointed prime minister in 2006.

Kuwait's parliament can question state business deals and in 2008 led the government to cancel a $17.4 billion joint venture with U.S. company Dow Chemical.

"We have a vision and a clear strategy with clear goals ... but where is the maestro who will execute these plans? It's time for the government to start performing," said Kamel al-Harami, a Kuwaiti oil analyst.

Over the past decade, Kuwait was able to attract just $1.5 billion in foreign direct investment, or a mere 0.5 per cent of total Gulf inflows, data from the United Nations Conference on Trade and Development (UNCTAD) show.

It lagged not only much less wealthy Bahrain with nearly $10 billion of FDI inflows in 2000-2010, but even an impoverished and violence-torn Yemen with $3.5 billion. UNCTAD ranks Kuwait as 135th among 141 states in its inward FDI performance index.

"The potential for political volatility there means that some foreign investors are cautious about making large commitments to the country. It is not unusual for projects to get held up or just not to happen," said Paul Gamble, head of research at Jadwa Investment in Riyadh.

Since 2004, Kuwait's projected budget spending has tripled to a record 19.4 billion dinars planned for the 2011/12 fiscal year, which started in April, with expenditure on wages for government employees rising almost as fast.

Still, the Arab state, whose 2011 gross domestic product is expected by private economists to grow around 4.4 percent, managed to spend only 76 per cent of its 2010/11 budget.

"One of the problems historically with Kuwait's budget is that they have underspent, particularly in terms of planned investment spending, because they were not able to get projects up and running. That's a big issue for them," Gamble said.

In July the International Monetary Fund described a shortfall in meeting the development plan's spending targets as one of the main risks to Kuwait's economic outlook.

Despite its ballooning budget, Kuwait, which has experienced only very limited and peaceful street protests this year demanding the removal of the prime minister and better infrastructure, health and education, has the financial muscle to deal with short-term weakness in oil prices. Economists in a Reuters poll forecast it will book a fiscal surplus of 20.2 per cent of GDP in 2011/12.

"For Kuwait to commit to its current budget, oil prices need to be at an average of $88 a barrel for the year," said Jassim al-Saadoun, chairman of Kuwait's al-Shall Economic Consulting.

Brent crude prices are down from April's peak of $127 because of fears of a global recession, but they still stand around $110 per barrel.

Kuwait has foreign asset reserves worth $22.5 billion in the central bank and over $290 billion in the Gulf state's sovereign wealth fund. Credit rating agency

Standard & Poor's estimated the government's net asset position at about 211 per cent of GDP at end-2010.

So unless oil prices fall dramatically from current levels, the economy is likely to be able to muddle through for some years regardless of what policies are adopted. This may reduce pressure for a resolution to the political conflicts hindering economic reform.

"Given the hardly changed composition of government, we expect the policy stalemate between the government and parliament to remain a salient feature of Kuwaiti politics," S&P said in July.

"The political stalemate will likely hamper implementation of Kuwait's ambitious...development plan...to eventually turn Kuwait into an international trade and financial hub."

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