Kuwait: Year in Review 2012

The year 2012 was one marked by ups and downs for Kuwait, with a record profit highlighting the country’s economic growth, but also exposing its perpetuating reliance on oil revenues. While the planning of new infrastructure projects and growth in the banking sector showed that the country is recovering well from the effects of the 2009 economic crisis, the political scene was dominated by tensions between the government and opposition, which left the parliament paralysed for most of the year.

Kuwait’s GDP is on target to expand by an average of 5% per year over the next few years, according to the IMF, building on a strong performance in 2011 which produced growth of 5.7%.

In a trend that reinforced Kuwait’s positive economic performance, local banks posted strong third-quarter 2012 returns, with many institutions recovering from negative growth in the second quarter caused by allocating funds for provisioning against potential defaults. A number of banks have signalled their intention to continue approaching lending with caution and maintaining a strong provisions base in 2013 as part of an effective ongoing strategy to protect against market volatility.

The economy remained dominated by oil revenues in 2012, reflecting its listing in OPEC’s annual statistical bullet as the organisation’s fourth-largest producer of crude oil. However, the government’s National Development Plan (NDP), which maps out a strategy for economic expansion into 2035 through a series of five-year plans, puts the spotlight firmly on diversifying away from a reliance on hydrocarbons.

The current 2010-14 plan pinpoints significant investment in infrastructure projects, listing, among others, work on roads, ports, a $3.6bn expansion of Kuwait International Airport, a transportation network linking Kuwait to other GCC countries and an offshore tourism resort.

The construction industry in particular should see significant growth on the back of key projects. While construction was hit hard by the effects of the financial crisis, registering a 9.8% drop in activity in 2009, data compiled by the Irish market research company Research and Markets indicates that the sector should expand at a compound annual growth rate of 7.45% between 2012 and 2016.

Following lengthy delays, the Kuwaiti cabinet passed the national budget for 2012-13 in early October, forecasting revenues of KD13.8bn ($48.9bn), up 3.7% on anticipated income for 2011. Spending, meanwhile, is expected to reach KD21.2bn ($75.2bn), marking a rise of 9.3% on last year’s projections.

While the current budget forecasts a shortfall of KD7.3bn ($25.88bn), mainly due to highly conservative oil price estimates, the country is expected to follow the pattern of previous years by ending the 2012-13 fiscal year with a surplus. Kuwait has predicted annual budget deficits for over a decade but has always finished the year in the black. At the end of the 2011-12 fiscal year, for example, the country posted a record surplus of $47bn.

Kuwait’s 2012 budgetary decisions were hit by lengthy delays, largely caused by ongoing tensions the government and the opposition, which escalated when the emir dissolved parliament in December 2011 following corruption allegations. Tension mounted when a new parliament, formed by the opposition after it won a majority in February’s elections, was dissolved by the constitutional court six months later. The 2009 parliament was then reinstated, prompting the opposition to boycott parliamentary sessions in protest that the dissolution process was illegal.

The emir again chose to dissolve the National Assembly in October, paving the way for new parliamentary elections. However, the opposition’s decision to boycott the most recent round of elections in December in protest at changes to the election law enacted by the emir in October suggest that the uncertainty is far from over. The boycott also meant that turnout reached just 40%, down 20% on last February’s election. Low turnout could open the door for the opposition to question the legitimacy of the recently elected parliament on the grounds that it fails to represent the population.

While 2012 was undoubtedly a positive year for the Kuwaiti economy, with continued investment in infrastructural developments coming on the back of a record surplus, the political situation looks likely to remain rocky in the coming months. Observers will be hoping that the appointment of a new National Assembly brings to an end the paralysis that has characterised Kuwait’s parliament, making way for new legislation and reforms.