Just as Kuwait’s $110bn, five-year National Development Plan (NDP) was coming to a disappointing conclusion, the government signed off a key infrastructure scheme in December, which has given businesses and financial institutions renewed optimism that the next five years will be more fruitful for the Gulf state’s economy.

“The government was finally able to move forward with the Al-Zour North [power project],” says an economist at a major local bank. “It was in the pipeline for so long, it had to come through. It has definitely lifted sentiment, both internally and internationally.”

On 12 December, project agreements were finally signed on the Al-Zour North independent water and power project (IWPP), the first scheme in Kuwait’s ambitious $28bn public-private partnership programme.

CFP progress

The financial close of Al-Zour North was quickly followed by the award in February of three engineering, procurement and construction (EPC) deals worth a combined $12bn for the long-delayed Clean Fuels Project (CFP) that will upgrade the country’s refineries.

The government needs to reduce red tape and streamline decision-making. Reforming legislation will also help

Economist at a major local bank

“The [CFP] was pushed through more quickly than people thought it would be this year,” says the economist. “These important projects will boost volumes in the stock market and international firms and contractors will become more interested in Kuwait’s projects market.”

With Kuwait’s real GDP growth forecast to have dropped sharply to 0.8 per cent in 2013, from 6.2 per cent in 2012, the awards on these major infrastructure schemes have been welcomed by local and international investors. However, more progress is required before the country’s economy will be on a path to sustainable long-term growth.

Kuwait’s GDP is expected to decline further in 2014, with The National Bank of Kuwait (NBK) forecasting a contraction of 0.6 per cent this year, before a recovery of 3.1 per cent growth in 2015.

The slowdown in economic expansion is primarily due to cuts in oil output. 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.

“Kuwait [increased] oil production in 2012 to make up the deficit from Libya, following the revolution there, and this resulted in a drop in 2013,” says a financial analyst in the country.

NBK forecasts that oil GDP will decline further in 2014 due to a weakening of global demand and an increase in non-Opec supply. This will force Opec countries, including Kuwait, to reduce output to balance the market and maintain prices of about $100 a barrel. The lender predicts that Kuwait’s real hydrocarbons GDP will shrink by 4 per cent in 2014, before rebounding to 2 per cent in 2015.

Non-oil growth

Although the drop in oil production will impact the headline rate of economic growth this year, progress is now being made with Kuwait’s economic diversification efforts. While the non-oil sector has struggled to expand in recent years, the Washington-based IMF estimates non-oil GDP growth reached 3 per cent in 2013, up from 2.2 per cent in 2012, and forecasts it will rise further to 4.4 per cent in 2014. NBK, meanwhile, expects non-hydrocarbons GDP growth to reach 4.5 per cent in 2014 and remain flat in 2015.

The increase in non-oil GDP is expected to come from a combination of progress on major government-funded infrastructure projects and growth in the consumer sector. However, both these elements are dependent on several factors, which may result in growth falling short of expectations.

Kuwait is pressing ahead with tenders for a second IWPP at Al-Zour, as well as the Al-Khiran IWPP, and is also planning to invite bids for the long-awaited fourth refinery scheme by the end of 2014. Another major upcoming infrastructure project is the proposed $3.5bn new terminal at Kuwait International Airport. However, while recent progress with these schemes is encouraging, it may take longer for the benefits to be felt.

“Money is starting to hit the economy, but how fast is the key question,” says the economist. “These are multi-year, multibillion-dollar projects. For major oil and refinery schemes, it can take four or five years for money to filter through and for power projects it takes at least three years.”

Growth in the consumer sector has played a key part in the expansion of non-oil GDP and is expected to remain an important driver in 2014. In the first half of 2013, point-of-sale transactions were up 17.9 per cent on the same period the previous year, according to data from NBK.

Job creation

The increased consumer spending is partly due to job creation and large public sector pay rises over the past two years. Average Kuwaiti employment growth reached 3.3 per cent in the first half of 2013, up from 2.8 per cent at the end of 2012. Even the private sector recorded an increase, with the number of Kuwaitis in private sector jobs reaching 2,900 in the first half of 2013, more than double the level of the previoius year.

Consumer credit also grew in 2013, with the monthly net increase in loans averaging KD103m ($366.2m) in the second quarter, a sharp rise from KD78m in the first quarter and KD93m for the whole of 2012. Consumer spending should be supported further following the passing of a new Family Fund Law, which provides locals with loans from 2008 and before to reschedule them without interest for up to 15 years.

Kuwait’s strengthening consumer sector was supported by growth in business lending in the second half of the year, particularly to the oil and real estate sectors, according to NBK. As a result of rising consumer and business lending, private credit as a whole grew at its fastest rate in four years in 2013.

“Due to a strong performance from business lending in the latter part of the year, we reached about 8.1 per cent credit growth, which is fairly decent,” says the local banking source. “Going forward, we expect the consumer side to moderate, and for the business side to improve”.

While the increase in business credit growth is encouraging, Kuwait’s private sector still lags far behind the public sector and lack of activity is holding back the state’s diversification efforts. The NDP had planned for half of the proposed $110bn investment on infrastructure projects to come from the private sector. However, with 91 per cent of the $8.95bn-worth of contract awards made in 2013 emanating from the public sector, according to regional projects tracker MEED Projects, it is clear the country’s projects market is still dominated by the state.

A central aim of the plan was to increase the role of the private sector in the economy and encourage more locals to work for private companies. However, the government’s failure to meet the targets in the plan, combined with its approval for additional large public sector wage increases, has prevented substantial progress being made in attracting private investors.

“For the private sector to emerge, it requires support and assistance from the government, particularly in the beginning,” says the economist. “And this just hasn’t happened yet. The government needs to reduce red tape and streamline decision-making. Reforming legislation will also help.”

Long-running efforts to privatise national carrier Kuwait Airways provide an example of how the government has been unable to make progress with a scheme that would stimulate private investment and reduce pressure on public coffers.

Kuwait Airways is not required to publish regular financial reports, but it is said to have built up more than $275m in losses in 2010/11. It has also not managed to report more than one year’s profitability in the past 20 years, and is a continuous strain on government budgets.

“[Kuwait Airways] is a very uncompetitive airline,” says the local economist. “It is extremely overstaffed and probably has the highest number of employees for each seat of any airline. It weighs on the system.”

The privatisation of the struggling airline was first approved by the National Assembly (parliament) in January 2008. Some six years later, there has been little tangible progress towards achieving this. In January 2013, more than two years after the previous attempt was suspended in October 2011, the government relaunched the privatisation, with the National Assembly agreeing to pay off the airline’s losses. But by the first quarter of 2014, there was little news of the next steps towards the proposed privatisation.

Attracting investment

The government has, however, made some recent progress in amending legislation to try and encourage private investment in its development programme. In mid-2013, it approved the new Direct Investment Promotion Law and is currently adjusting the country’s build-own-transfer legal framework to make projects more attractive to local and international investors. Also in 2013, the government launched a KD2bn fund for small-to-medium-sized enterprises to encourage locals to start their own businesses.

The combination of progress with vital major infrastructure schemes and an expected drop in oil revenues, makes 2014 an important year in Kuwait’s mid-to-long-term economic development. While the awards of the contracts to build the Al-Zour North IWPP and the CFP are encouraging, the government needs to do much more to push ahead with economic and structural reforms, and encourage private investment.

A key starting point will be to complete its next five-year development plan, which was due to be announced before the end of 2013, but like many of Kuwait’s major initiatives in recent years, is running behind schedule. If the country is to push on from the good start it has made to the year, the government and parliament need to ensure they work together to seize the initiative.