The Middle East petro state with the most riding on rising oil prices isn't Saudi Arabia — it is Kuwait

The Middle East petro state with the most riding on rising oil prices isn't Saudi Arabia — it is Kuwait

It used to be much harder for a foreign investor to obtain a commercial license, having to wait an average of 60 days, which in 2015 was reduced to three days. The costs of licenses have also decreased. Foreign investors also are now able to own 100 percent of the shares of companies they incorporate in Kuwait, and receive exemption from income taxes for up to 10 years. These changes have prompted the private sector to pick up.

Sophie Olver-Ellis, a research officer at the Middle East Center of the London School of Economics, said Kuwait’s Vision 2035 is promising and that the private sector is spearheading the transition to a non-oil economy. She said that the public sector assumes as much as 90 percent of development projects and the nation is trying to reduce that role by 30 percent to 40 percent.

Kuwait has a unique political impediment compared to other Gulf states as it attempts to diversify. It has an active parliament, the National Assembly, which calls the government to account for economic decision-making and has, in the past, blocked major infrastructure and energy initiatives that would modernize and expand Kuwait’s existing economic base. This political brake on economic reform is not present in other GCC states, Coates Ulrichsen said. He noted that the nation is still recovering from the political paralysis that gripped Kuwait between 2006 and 2012, when there were six elections and more than a dozen Cabinet. That did “great harm” to Kuwait’s international investor image and regaining lost confidence among investors about parliamentary pressures remains an issue.

Kuwait’s movement to a more balanced economy could reduce volatility in the market. Dramatic changes in oil prices lead to huge swings in its economy. Even with the recent recovery in oil prices, Kuwait is expecting another budget deficit for the 2018-2019 fiscal year of $21 billion (about 17.5 percent of gross domestic product), its fourth-straight annual deficit. The government has had to finance recent deficits from its $600 billion state reserves and bond offerings.

“Government spending is tied heavily to oil revenues, so the health of the public sector closely tracks oil price rises and falls,” Coates Ulrichsen said.

State revenue of $49.5 billion is below the expected spending level of $71 billion. Many have criticized the government’s failure to diversify, and its decision to increase revenue during its years of deficit by increasing electricity and water charges.

“It remains to be seen how successful it is going to be because it [diversification] is in the early stages,” said Oliver-Ellis.

According to Moody’s, Kuwait has been slower than its regional peers in developing its non-oil and private sector. But Oliver-Ellis said she does not view the country’s economic liberalization plan as being far behind efforts in Saudi Arabia, whose larger population prompted a quicker diversification effort. Kuwait has a population of roughly 4.4 million, while Saudi Arabia’s population over 32 million. But if Kuwait does not diversify, it will not be competitive in the 21st century, she said.

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