FRONTIER MARKETS REPORT: KUWAIT
Kuwaiti legislature has cut red tape and is offering more inducements for FDI. But is the rest of the regime on board?
Kuwait’s government in June 2013 passed a law promoting foreign direct investment in the country. The law created a new agency tasked with encouraging foreign investment, called the Kuwait Direct Investment Promotion Authority; allowed 100% foreign ownership of some enterprises and the freedom to transfer capital abroad; formalized a commitment to a one-stop shop for license applications; streamlined land grant applications; and maintained tax incentives. It also promised a streamlined “negative list” of sectors closed to foreign investment, implying that other sectors would be open to FDI.
Lebanese-born Atif Kubursi, economics professor at McMaster University in Hamilton, Ontario, explains that the new law replaced laws that had not generated as much FDI as hoped, partially owing to licensing difficulties and delays in conveying land grants. In some cases it seemed easier to do business through a Dubai-based corporation than to set up a company in Kuwait. “There is quite an optimism that the new law is going to bring in substantially higher levels of foreign investment.”
But as of mid-May the operational regulations for the new law had not been ratified—leaving potential investors in a holding pattern. “As it now stands, the architecture is there and is very favorable to foreign investors,” Kubursi explains.
Carole Nakhle, a London-based energy economist and director of Crystol Energy, cautions that the new regulations will not open the upstream oil and gas sector to outside investment. “Kuwait is one of the very few countries in the world where private investment in upstream oil and gas is not allowed,” she explains. Its constitution vests full ownership of these resources in the state. There could, however, be new FDI opportunities in exploration and downstream services and other areas not involving ownership of resources.
Kuwait’s economic, social and political scenes hold other challenges for residents and outside investors. Economically, there is little impetus for diversification outside of the oil and gas sector, owing to the seeming assurance of continuing revenues, according to Nakhle. Oil provides 60% of Kuwait’s gross domestic product and 93% of export revenues, according to the Organization of the Petroleum Exporting Countries.
Social challenges include the high cost of its heavily-subsidized welfare state. An International Monetary Fund consultation paper last September warned that “recent sharp increases in current expenditures … combined with small non-oil revenues could mean that government expenditure would exceed oil revenues by 2017 or 2018.”
Although the new law may resolve some difficulties, it will not decrease ongoing conflict involving the Capital Markets Authority, the market regulator. Parliamentarians and members of the private sector consider its requirements too complex and have called for modifications to make Kuwait more attractive to local and foreign investors.
On the political front, difficult relationships within Parliament and between Parliament and the executive branch continue to slow down developments. “There has always been a tug of war between the executive and legislative branch, and the new Parliament is still in that tradition of adversarial relationship,” Kubursi explains. This history and a fear of corruption explain long delays in approvals of infrastructure projects, including a subway in Kuwait City.
However, if the new FDI promotion law is ratified, it could open the door to multinational investment.
VITAL STATISTICS |
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Location: Northwest corner of the Persian Gulf |
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Neighbors: Iraq, Saudi Arabia, Iran |
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Capital city: Kuwait City |
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Population: 3,250,496 (2012) |
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Official language: Arabic |
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GDP per capita (2012): $56,374 |
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GDP growth (2012): 6.2% |
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Inflation (2012): 2.8% |
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Currency: Kuwaiti dinar |
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Investment promotion agency: Kuwait Direct Investment Promotion Authority www.kfib.com.kw |
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Investment incentives available? Income tax and other tax exemptions for up to ten years |
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Ease of Doing Business rank: 104 out of 189 (2013) |
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Corruption Perceptions Index rank: 69 out of 177 (2012) |
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Political risk: General Middle East tensions Continued tension between branches of government |
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Security risk: Popular protests, but none recently Unclear maritime boundary with Iraq in the Persian Gulf |
PROS |
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One of the world’s largest oil producers |
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New FDI promotion law would dramatically improve investment conditions |
CONS |
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Foreign ownership of resources is prohibited |
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Proximity to Iraq and Iran |
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The legal system can be confusing as it is a combination of Islamic, French and English laws |
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Ineffective measures against human trafficking and reports of abusive labor practices |
Sources: Organization of Petroleum Exporting Countries, Transparency International, United States Energy Information Administration, World Bank
For more information on Kuwait, check out our Country Economic Reports by clicking HERE.
