2015 breakeven oil price $47

2014 breakeven oil price $57

Kuwait’s decision to cut its budget for 2015/16 should not come as a great surprise due to the heavy reliance of its economy on the oil sector. Hydrocarbons account for about 90 per cent of the country’s budget revenue and about 95 per cent of exports.

While details of the cuts have not yet been publicly released, the government is keen to stress that capital investments in major projects will not be affected, with the reductions applied to operating expenses such as official missions.

Five-year plan

Kuwait’s commitment to delivering much-needed infrastructure projects was reaffirmed in February, when its parliament approved an ambitious $116bn five-year plan. The delayed approval, more than a year after the previous programme ended, is symptomatic of the slow and often ineffectual nature of Kuwait’s decision-making processes and development strategy in recent years.

A number of structural and legislative reforms were implemented in early 2015 in an attempt to improve the situation. These included amendments to the country’s independent power project law and governing body. It is important that these reforms are successful if Kuwait is to begin making progress with its vital infrastructure programme.

According to data from the Washington-based IMF, Kuwait’s GDP growth fell marginally to 1.3 per cent in 2014, from 1.5 per cent in 2013; significantly down from the 6.6 per cent growth achieved in 2012. The growth was also substantially lower than the average annual growth of 5.2 per cent recorded between 2000 and 2011.

The primary culprit for the reduction in GDP growth in 2013 was the drop in oil revenues due to a cut in production. In the first half of 2013, crude production fell by 0.5 per cent, from 2.98 million barrels a day (b/d) to 2.93 million b/d, resulting in a $5.4bn reduction in total oil exports. The drop in output in 2013 followed a ramp-up in production in 2012 to compensate for the loss of Libyan crude. As a result of the cutback in production, Kuwait’s oil GDP growth fell to -0.8 per cent in 2013 and recovered to remain flat in 2014.

The drop in oil prices will prevent Kuwait’s income from recovering in the short term, with the IMF forecasting hydrocarbons GDP will rise slightly to 0.3 per cent in 2015 and drop to 0.2 per cent in 2016. The National Bank of Kuwait forecasts that oil GDP growth may drop further to -2.3 per cent in 2015.

While the outlook for Kuwait’s hydrocarbons sector is less positive than in recent years, the effects will be mitigated to a degree by an improvement in the country’s non-oil economy, which for many years lagged behind its GCC neighbours. A pickup in the consumer sector in recent years has played a major part in this. Further progress will be dependent on the country’s success in growing the role of the private sector.

Non-oil GDP growth will be boosted by capital spending if the government delivers on its infrastructure projects in the new-five year development plan. These include the $14bn New Refinery Project and several major utilities, roads and transport schemes. These projects were all in the previous five-year plan, but protracted tendering procedures and fissures between government and the elected parliament stalled progress on several major schemes.

PPP reforms

The prospects for delivering a number of major projects have been improved by reforms to the country’s public-private partnership (PPP) sector and private investment laws.

The decision to reform the country’s underperforming PPP body, formerly called the Partnerships Technical Bureau (PTB), and amend related legislation was taken following the drawn-out negotiations and award of the country’s first independent water and power project (IWPP), Al-Zour North.

In January 2015, the reincarnated Kuwait Authority for Public Partnerships (KAPP) replaced the PTB as the body leading the country’s IPP programme, and the publication of executive regulations in March finalised amendments to the legislation.

KAPP has already set out its intentions to make progress with its backlog. It has invited expressions of interest for the country’s next two IWPP projects, Al-Zour North 2 and Al-Khiran 1, and has revived the Umm al-Hayman wastewater and Kabd municipal waste PPP schemes. These were followed by the initiation of the prequalification process for the country’s first integrated gas and solar power project, Al-Abdaliyah. 

The relaunched Kuwait Direct Investment Promotion Authority should make it easier for foreign investors to become involved with these projects. Other reforms include shelving the offset programme, under which international firms that won government contracts were required to invest in the local economy.

In the new era of lower priced oil, it is vital that Kuwait is able to further widen the structural and legislative reform process if it is to achieve diversified growth and meet its development targets.