Kuwait | Country Report
PROPOSED INSOLVENCY LAW PAVES WAY FOR FDI
Kuwait, unlike its Gulf neighbors in the UAE and Qatar, has been slow to diversify its economy away from dependency on oil revenues. There is a certain logic to that course, as it still has around 89 years in crude and gas reserves at the current rate of production. Yet if Kuwait is to develop a thriving private sector, improvements are needed in the quality of political, administrative and legal institutions, particularly if it wants to attract foreign investment. The news that Kuwait is finalizing an insolvency law could radically alter the investment climate and, depending on timing, would be the first such law in the Gulf Cooperation Council. To be fair, the non-oil sector is gradually contributing a larger share of GDP, and there is an expectation it will gather pace in 2015 (see chart).
Supporting that drive are bodies such as the recently created Kuwait Direct Investment Promotion Authority (KDIPA), which was set up to be a one-stop shop for attracting foreign investment, replacing the Foreign Direct Investment Office. However, analysts say the agency charged with overseeing the new direct investment promotion law is still deciding upon its remit, which will no doubt concern investors. Indeed the KDIPA itself says it has yet to finalize legal, administrative and financial requirements, as well as executive regulations. The Authority has its work cut out. The economy lacks competitiveness, which is reflected in lackluster foreign direct investment inflows when benchmarked against regional peers. In Transparency International’s 2014 Corruption Perceptions Index, Kuwait ranked 67 out of 175 countries, the lowest in the GCC, compared to the UAE at 25th.
Nevertheless, the outlook for FDI in the energy sector is encouraging, says Farouk Soussa, Middle East chief economist at Citi. “A large focus of the development plan is in the energy sector, particularly in power generation, so prospects there look particularly good.” Aside from exploration, it is likely energy infrastructure will be the core of FDI, rather than upstream refining. Although Kuwait is largely immune from the rout in oil prices, some analysts say the pricing environment may help when it comes to speeding up reforms. “The decline in oil prices might be a good thing and get the government to take action sooner rather later,” says Steffen Dyck, vice president and senior analyst at Moody’s sovereign risk group in Singapore.
Yet, even with oil prices as they are and pressure to develop the private sector, there are still investment opportunities in exploration, says Carla Slim, Middle East North Africa economist at Standard Chartered: “We expect growth to be driven by the non-oil sector, while the oil sector’s performance is set to remain flat. Investments to expand oil production capacity in the next five years should help support the government’s initiatives in investing in its own economy.” Kuwait is also expected to invest in Iraq’s energy sector.
The trouble is, for all of the planned initiatives Kuwait has a reputation of being a difficult place to do business—largely because of a challenging bureaucracy and institutionalized skepticism of foreign investment. In 2015 it will need to work to overcome this reputation.
