Kuwait is one of the smallest but richest countries in the world. The proposed fiscal and financial market reform aims to harness its growth potential beyond oil and gas.
For at least a decade, one of the Gulf’s most democratic monarchies has been paralyzed by a political tug-of-war between leaders eager to open the economy and those who would prefer to maintain a tightly controlled oil rentier state. Today the situation seems to be breaking the deadlock.
Last month, Mohammad Sabah Al-Salem, Kuwait’s new prime minister, presented his government’s action plan to parliament, including a package of financial and economic reforms. He said the emirate could no longer “maintain a welfare state solely on depleted natural resources.” Measures being discussed include allowing Kuwait to borrow from international markets; the admission of commercial banks into the real estate loan market, ending the monopoly long enjoyed by the Kuwait Credit Bank; and expanding the tax base through new corporate taxes on local companies.
Although most countries in the region are diversifying away from oil and gas, such sales still account for more than 90% of both Kuwait’s exports and revenues. It is reported that salaries and subsidies for civil servants will account for 79.4% of government expenditure in the 2024/2025 financial year. Any threat to the Kuwaitis’ fairly tranquil way of life is bound to cause controversy; However, the new prime minister, who held several government positions before resigning in 2011 to protest corruption, is reportedly popular among Kuwaitis, even in influential financial circles.
A country’s economic growth typically reflects fluctuations in the global energy market. According to the IMF, when oil prices were high in 2023, GDP increased by 8.9%. Last year, amid OPEC+ production cuts, it barely reached 0.1%. But the emirate’s oil and gas reserves have historically been a strong safety net, and it has ample reserves in case of bad weather.
“Kuwait’s financial institutions stand out as not only among the largest and most resilient in the region, but also among the most profitable,” says Salah Al Fulayj, CEO of the National Bank of Kuwait (NBK), the country’s oldest bank. bank and the second largest lender with assets of more than $120 billion.
The emirate’s powerhouse is the Kuwait Investment Authority, one of the world’s largest sovereign wealth funds with more than $800 billion and net assets that average 470% of GDP. Local banks, both conventional and Islamic, are also exceptionally well capitalized and profitable. “The banking sector is the cornerstone of the economy,” says Ali H. Khalil, CEO of Kuwait Financial Center (Markaz), an asset management and investment banking firm. “This financial strength not only mitigates [the banks] against market volatility, but also enables them to capitalize on growth opportunities.”
Besides keeping Kuwait’s pockets full, Kuwait is careful with its money. Citing “strict prudential supervision by the central bank,” the International Monetary Fund, in its latest Article IV mission statement, noted that “the impact of the turmoil in the global banking sector on Kuwaiti banks has been muted.”
Kuwaiti lenders recorded strong financial results last year, says Abdulwahab Al Rushood, acting group chief executive of Kuwait Finance House (KFH), the emirate’s largest bank, which reported a record profit of $1.5 billion in the third quarter (see chart). box, page 80). Banks also “showed strong financial strength in terms of asset values, capital adequacy and liquidity ratios,” he says.
According to the Central Bank of Kuwait (CBK), local lenders recorded a cumulative net profit growth of 46.7% year-on-year in the first nine months of 2023, while their overall capital adequacy ratio stood at 18.3%, liquidity coverage at level of 18.3%. 178.2%, and net stable financing – 112.5%. This is “significantly higher than the required indicators,” the regulator reports. The percentage of non-performing loans was low at 1.7%. “Kuwait’s banking sector is positioned to face future challenges from a position of strength thanks to a more favorable economic environment,” says Basel A. Al Haroon, Governor of the Central Bank of Kuwait (CBK).
Fiscal and structural problems
Although the emirate has enough funds to withstand an external shock, the CBK is one of the parties advocating economic changes. “Large financial assets support Kuwait’s economic strength, but these assets alone cannot replace fiscal and structural reforms that would offset the risks of lower oil prices, weak future oil demand and rising marginal costs of production,” the central bank warned. in 2022.
The new prime minister’s government, appointed in January, is Kuwait’s ninth government in four years; but if financial observers are right, the ninth time could be special. As finance minister, former banker Anwar Al-Mudhaf raises particularly high expectations among industry stakeholders. “The stock market reacted positively,” says Markaz CEO Khalil. “The government’s new initiatives to diversify the economy are particularly beneficial for the banking sector. By broadening the economic base, these initiatives are likely to lead to more business for banks.”
The new team also signals an “optimistic outlook” for Al-Fulaija NBK. “A proactive stance on fiscal and structural reforms is expected to enhance economic stability and diversify sources of income beyond oil,” he says. “Increased political stability and cooperation between government and parliament bodes well for the rapid implementation of critical reforms, improving the overall investment climate and creating a more business-friendly environment.”
The long-awaited new debt law, allowing Kuwait to access international debt markets, “will provide a structured approach to public financial management and ensure sound financial transactions. – says al-Fulaij.
The new mortgage law could also be a “significant catalyst for growth,” Khalil says. According to the CBK, the total amount of loans in Kuwait is about 50 billion Kuwaiti dinars (about $162 billion). With a backlog of home purchase applications of around 140,000 applications for an average expected loan amount of 90,000 dinars per home, the retail loan portfolio is expected to grow by approximately 12.6 billion dinars, Khalil said. “This legislation will result in annual loan growth of 5.25% compared to current organic growth. Banks expect their lending to increase; but they are still unsure how this will impact profits as new mortgage pricing rules are yet to be determined.
The government’s commitment to introduce new corporate taxes on local companies follows Kuwait’s entry into the OECD/G20 tax base erosion and profit shifting framework in November. additional government revenues will be directed to the non-oil sector of Kuwait,” Khalil predicts.
Increasing investor confidence
The fiscal and financial restructuring is consistent with efforts several years ago to attract foreign direct investment (FDI) by turning Kuwait into a trade hub connecting Europe, Asia and Africa – not unlike neighboring Dubai. To encourage capital movements, Kuwait completed the privatization of its stock exchange in 2019, prompting MSCI and FTSE to upgrade the emirate to emerging market status.
“As Kuwait continues to develop and diversify its economy, investors are attracted by the opportunities presented by this dynamic and promising market,” says Talal Bader Al Othman, vice president of asset management at ABK Capital.
FDI inflows into Kuwait grew by 16.8% annually to $758 million in 2022 from $348 million in 2017, but the figure remains below target, according to the UN Conference on Trade and Development. Last year, FDI amounted to just 0.2% of GDP, nine times lower than the regional average. However, Al-Othman is optimistic. “Since the beginning of 2024, we have seen a significant increase in investor interest,” he notes.
New regional banking power
A year and a half after acquiring Bahrain’s Ahli United Bank (AUB) for $11.6 billion, Kuwait Finance House (KFH) is completing its merger.
Late last year, the Central Bank of Bahrain approved AUB-Bahrain as a licensed Islamic lender, completing a conversion process that began several years earlier. The bank will now offer products and services that comply with Sharia law, which prohibits interest-bearing loans or investments in activities such as gambling or alcohol. In January, KFH also received approval from the Kuwait Capital Markets Authority to pursue a merger by combining KFH and AUB-Kuwait.
The merger between KFH and AUB, concluded in 2022, was the first cross-border consolidation in the region. The deal will create Kuwait’s largest bank and the second largest Islamic bank in the world with total assets of $120.8 billion.