Kuwait's evolving investment framework bodes well for future growth of trade and investment

With strong foreign reserves, a rapidly improving investment framework and a major state-led development programme under way, Kuwait is well positioned to attract growing levels of foreign direct investment (FDI) and trade in the coming years. While the government has cut back on current spending recently, capital expenditure has continued apace and is forecast to grow in the coming years. Furthermore, due in part to a raft of incentives put in place by the Kuwait Direct Investment Promotion Authority (KDIPA), which was established in 2013 as part of an ongoing overhaul of the nation’s FDI framework, much of this expenditure is expected to come from private firms, either directly or in the form of public-private partnerships (PPPs). Indeed, in 2015 and early 2016 a handful of multinationals moved to take advantage of Kuwait’s new investment environment, with positive implications for future activity.

On the trade front, oil exports are down and a relatively strong Kuwaiti dinar (compared to regional currencies) has limited non-oil export gains in 2015-16. That said, in the fourth quarter of 2015 these posted an increase for the first time in a year. Imports have also remained strong. “The consensus is that oil prices will remain depressed at around $40-50 per barrel for some time,” Naveed Ahmed, assistant vice-president at Kuwait-based firm Global Investment House (GIH), told OBG. “But the idea that this will cause huge problems for Kuwait is nonsense. The nation has vast amounts of capital – far more than many other countries in the region – and the government appears to be moving to make good use of it now.”

Oil Price Pressure

Nonetheless, the continued low price of Brent crude has put pressure on Kuwait’s economy, with consequences for the nation’s trade and investment activities. The government’s 2016/17 annual budget, released in late January 2016, shows an expected deficit of KD12.2bn ($40.4bn), up almost 50% on the previous fiscal year (FY). The rising deficit can be attributed in large part to oil prices. Hydrocarbons are expected to account for 78% of government revenues in FY 2016/17, down significantly from 94% in 2015/16. Kuwait’s trade surplus, which fell from KD20.7bn ($68.5bn) in 2014 to KD6.9bn ($22.8bn) in 2015 on the back of slowing oil export earnings, is forecast to fall further in the coming years.

FDI & Trade Data

Similarly, while it has seen growth in FDI since 2000, over the past five years Kuwait has reported declining inward foreign investment, even as it has largely remained the Gulf region’s largest outward investor. While these and other challenges are expected to continue to hinder trade and investment growth in the short term, the country’s medium-term outlook is widely considered to be more positive.

Indeed, in the past few years the state has moved to implement a raft of legislative reforms aimed at improving the investment environment. Since the launch of KDIPA under Law No. 116 of 2013 ( colloquially known as the FDI Law), the authority and other state entities have released various clarifying regulations aimed at ensuring the law is implemented efficiently and in a timely manner. Most recently, in January 2016 the Ministry of Finance (MoF) published amendments aimed at bringing Kuwait’s tax code in line with the FDI reforms enacted under the 2013 law, plus other recent legislation aimed at streamlining PPP activity and reforming the capital markets.

In 2015 Kuwait’s total exports reached KD16.5bn ($54.6bn), down by almost half from KD29.6bn ($97.9bn) in 2014 and by more than half from KD32.6bn ($107.8bn) in 2013, according to the Central Bank of Kuwait (CBK). The decline can be attributed almost entirely to lower oil exports, which were valued at KD14.7bn ($48.6bn) in 2015, down from KD27.7bn ($91.6bn) in 2014 and KD30.8bn ($101.9bn) in 2013. Non-oil exports, meanwhile, posted expansion in 2015, reaching KD1.86bn ($6.2bn), up from KD1.8bn ($6bn) in 2014. Over the past five years Kuwait’s non-hydrocarbon economy has swelled from KD1.37bn ($4.5bn) in 2010.

Import growth has remained strong in recent years, driven by a growing population, increasing economic activity and infrastructure spending. In 2015 Kuwait imported KD9.6bn ($31.8bn) of goods and services, up from KD8.8bn ($29.1bn) in 2014 and KD8.3bn ($27.5bn) in 2013, and almost double the 2009 figure. This rapid rise can be chalked up largely to rising consumer spending and state-led project development. The rising import bill, paired with the decrease in oil exports, has seen the trade surplus shrink by 66.7% between 2014 and 2015.

Trade Partners

While its GCC neighbours represent a major source of imports, Kuwait’s top import partners are geographically diverse. In the first quarter of 2016 the nation’s top source of foreign imports was China, at 15.4% of total import value. In second and third place were the US and the UAE, with 9.5% and 8.5%, respectively, followed by Japan (7.3%), Germany (6.9%), India (5.5%), Saudi Arabia (4.8%), Italy (4%), South Korea (3.7%) and the UK (2.7%). Others in the top-20 trade partners included France, Vietnam, Australia, the Netherlands, Thailand, Turkey and Switzerland.

Kuwait’s export bill is dominated by energy. Hydrocarbons exports accounted for nearly 89% of total exports in 2015, down from 93.9% in 2014 and 94.3% in 2013, for instance. Kuwait is a major supplier of energy to China and a number of other East Asian countries. Other major export products include organic chemicals and plastics and related articles, according to the Central Statistical Bureau. In the first quarter of 2016 the nation’s top non-oil export destination was Saudi Arabia, which accounted for 16.2% of Kuwait’s exports, followed by the UAE (12.3%), China (10.7%), India (9.9%) and Qatar (7.8%). Other major destinations included Iraq, the US, Indonesia, Jordan and Oman.

Investment In Figures

Historically Kuwait has had one of the lowest rates of inward FDI in the Gulf region. In 2015 it attracted $293m in FDI, down from $953m in 2014, $1.43bn in 2013 and $2.87bn in 2012, according to the UN Conference on Trade and Development (UNCTAD). These earlier figures correlate with initial optimism surrounding the government’s 2010-14 National Development Plan (NDP) and the subsequent delays in implementation of the programme.

Meanwhile, over the past five years Kuwait has been one of the largest sources of FDI outflows in the Gulf region. According to UNCTAD, in 2015 some $5.4bn in FDI flowed out of the country, up from -$10.5bn in 2014 and a high of $16.65bn in 2013, for instance. A major source of foreign spending in Kuwait is the government’s sovereign wealth fund, the Kuwait Investment Authority (KIA), which as of late 2015 had around $592bn of assets under management, making it one of the largest in the world, according to the Sovereign Wealth Fund Institute, a US-based research outfit.

Oversight

A handful of state entities are involved in regulating, promoting and developing Kuwait’s trade and investment environment and activities. Prior to the establishment of KDIPA in 2013, foreign players looking to invest in the country were in contact with the Kuwait Foreign Investment Bureau (KFIB), the MoF and other government units. Since 2013 KDIPA has taken over as the nation’s primary authority in charge for both local and foreign direct investment. Under Law No. 116 of 2013, KDIPA has a mandate to regulate, promote and develop Kuwait’s investment environment, with the goal of attracting FDI to help diversify the country’s economy, create jobs, improve training and educational opportunities for Kuwaitis, and enhance local economic activities through technology and skills transfer programmes. The authority also plays an advocacy role, pushing public-sector stakeholders to streamline their requirements to improve the business environment.

KDIPA provides a handful of services to potential investors, including issuing and renewing investment licences, publishing direct investment data and information, responding to inquiries from active and potential investors alike, and assisting when investors come up against hurdles, including regulatory issues, but also challenges related to expanding operations in Kuwait and uncovering new investment opportunities. The Ministry of Commerce and Industry oversees Kuwait’s trade environment and regulatory framework in conjunction with Kuwait Customs, while the Capital Markets Authority supervises the capital markets.

Legislative Framework

Laws aimed at codifying FDI activities at a national level were introduced relatively recently in Kuwait. Under the nation’s Commercial Law No. 68 of 1980, non-Kuwaitis were allowed to carry out business in the country only in conjunction with a majority shareholder local partner. Following the lead of other rapidly expanding Gulf economies in the late 1990s and early 2000s, in 2001 Kuwait’s government introduced Law No. 8, the nation’s first FDI law, which laid out a comprehensive legislative framework aimed at attracting FDI on a large scale. Under the law, foreigners were allowed to own 100% of a Kuwait-based business in a handful of sectors identified by the government as potential areas of future economic diversification and growth, including 14 sectors open for FDI such as downstream chemical manufacturing, transport, tourism and health care. A revised and updated version of this list added new areas like environmental services, logistics, and education sectors. However, under Law No. 116 of 2013 a shift was made from a positive list to a negative list approach, whereby all economic activities are open to foreign investors except for a short list of 10 activities approved by the Council of Ministers.

In 2010 the Kuwaiti government launched the five-year NDP, a large-scale development programme intended to upgrade the bulk of the nation’s physical and digital infrastructure. However, due to bureaucratic disagreements and changes in government, the 2010-14 NDP was only partially implemented.

Reform Under Way

Soon after the NDP was launched, KFIB and other investment-focused state entities began hosting regular meetings with domestic companies and international investors in order to identify ways of increasing FDI in Kuwait. This eventually led to the passage of Law No. 116 in June 2013. In addition to forming a new FDI authority in KDIPA, the law broadened the scope of foreign investment activity considerably. “Effectively Kuwait has become a free zone for most international investors in most sectors,” Martin Hall, CEO of the Kuwait British Business Centre (KBBC), a UK government initiative to support investment in both nations, told OBG. “If you meet the requirements laid out by KDIPA – and it is relatively straightforward to do that – you can own 100% of your company here.”

As detailed in the law’s executive regulations, published in December 2014 by KDIPA, investment in Kuwait can be structured in one of three ways. First, a foreign investor may establish a Kuwaiti company with up to 100% foreign equity. Second, a foreign firm may establish a branch in Kuwait in order to facilitate direct investment. Third, a foreign investor may set up a representative office in Kuwait, so long as the facility’s activities are restricted to market research and the firm’s representatives do not engage in commercial activity. The list of sectors where 100% foreign ownership is not allowed includes oil and gas, fertiliser and nitrogen compound production, all real estate activities (except private construction projects), domestic labour services, any activities that already have a professional body in Kuwait, such as practicing law, and security and defence.

The law has attracted a significant number of foreign multinationals in recent years. In April 2015, for example, IBM announced it would open an office in Kuwait – the US-based technology company’s first – in an effort to better serve the Gulf and broader Middle East, which has accounted for a growing percentage of its business in recent years. “We believe that Kuwait is a particularly important geography within the Middle East, given a diversifying economic landscape and the continued maturity of the country’s IT sector,” said Amr Refaat, the general manager of IBM Middle East and Pakistan, in a speech at the announcement.

More recently, both Huawei Technologies, the Chinese telecommunications company, and US engineering giant GE have announced plans to invest in Kuwait. Huawei’s plans, for which the firm had yet to release more details as of early September 2016, involve technology and related training. GE, meanwhile, will invest $82.9m to establish the GE Kuwait Technology Centre focusing on research and development in energy generation.

Joint Efforts

Another key piece of FDI-related legislation introduced in recent years was Law No. 116 of 2014, generally known as the new PPP law, which replaces an older PPP law, Law No. 7 of 2008. Broadly, the new law codifies a number of techniques, policies and procedures related to project financing that had previously been difficult to carry out in the country. These practices span a range of areas, including, among other things, the incorporation and structuring of shareholder agreements, selling and warehousing shares reserved for domestic investors during the early stages of a project, and financial security for investors in development projects. The new PPP law officially came into effect upon publication of the policy’s executive by-laws in late March 2015.

Under the law a new authority was established to oversee PPPs in Kuwait, namely the Kuwait Authority for Partnership Projects (KAPP), which replaced the previous Partnerships Technical Bureau. KAPP’s mandate includes supporting government authorities throughout the PPP process, conducting research to identify potential new PPP opportunities and developing PPP contract guidelines, among other tasks. The authority will support a newly formed Higher Committee – a group of ministers appointed by the government – which is empowered to make decisions about launching and approving PPP projects in Kuwait, pending approval by the minister of finance.

Deep Roots

The development of Law No. 116 can be traced back to the development of the Az Zour North independent water and power plant (IWPP), a government-led project that was established in 2012-13. In late 2013 the state listed half of the shares of the IWPP on the Kuwait Stock Exchange (KSE), in what was widely considered to be the first PPP-structured project in the country. The success of this model led the government to codify similarly novel funding schemes under the 2014 law.

As of early 2016 the first phase of the Az Zour project had been completed. In September 2015 the state shortlisted seven firms for the second phase of Az Zour North, which will have an initial capacity of 1800 MW. Shortlisted companies, which were selected by KAPP, include the Korea Electric Power Corporation; and Japan’s Sumitomo Corporation, Mitsubishi, and Mitsui, among others.

Recent Updates 

In January 2016 the MoF published a series of crucial amendments to Kuwait’s tax law in an effort to formalise the investment incentives laid out in the 2013 FDI law, the 2014 PPP law and Kuwait’s 2010 Capital Market Authority Law, the latter of which has resulted in the reform of the KSE and related entities (see Capital Markets chapter). Under the new MoF amendments, foreign entities that have received tax exemptions under the FDI law are required to submit a detailed analysis of the total taxable amount and value of the exemption, plus a copy of the KDIPA-issued exemption certificate.

Additionally, tax-exempt status has been extended to a handful of foreign investment categories, including foreign airlines that reciprocate with tax exemptions for Kuwaiti airlines in their home countries, and returns from securities listed on the KSE, including interest and dividends from stocks, bonds and all other investment and Islamic products. Other amendments issued as part of the early 2016 MoF package streamlined tax practices with regard to the carrying forward of losses by foreign investors, and codified Kuwait’s stance on foreign entities and the payment of zakat, the Islamic obligation to pay a certain percentage of the value of a company as a form of religious tax.

Concrete Improvement

Despite their relatively recent (and in some cases ongoing) implementation, these regulatory changes have resulted in tangible improvements to Kuwait’s investment environment. In the 2015-16 Global Competitiveness Index (GCI), an annual report from the World Economic Forum (WEF) that measures the productivity, prosperity and business landscape of 140 economies around the world, the country ranked 34th. This was an improvement on the previous year, when it ranked 40th out of 144 countries.

Tellingly, the country has posted marked improvement in recent years on a number of metrics related to FDI. For instance, on the top-line indicators that measure financial market development, technological readiness and business sophistication, the nation ranked 73rd, 56th and 63rd, respectively, in 2015-16, up significantly from 77th, 74th and 76th in 2014-15. In terms of the business impact of rules on FDI, Kuwait’s ranking improved by two places from 139th to 137th. In terms of FDI and technology transfer it jumped from 141st to 132nd.

Trading Up

While the nation’s overall rank in the World Bank’s most recent “Doing Business 2016” report dropped by one spot to 101st (out of 189 countries), Kuwait rose a spot on the top-line metric “trading across borders”, which measures the efficiency (in terms of both cost and time) of exporting and importing goods. The country performed particularly well compared to MENA as a whole on a handful of key trade indicators, including time needed to prepare documents for export, the cost of export document preparation, and the cost of importing goods, specifically with regard to border and documentation compliance.

Outlook

As these rankings suggest, Kuwait continues to face a number of challenges with regard to trade and FDI. Indeed, inefficient government bureaucracy ranked as the most problematic factor for doing business in Kuwait in both the 2015-16 and 2014-15 GCI reports. Other hurdles named in the WEF report include lack of access to financing for most corporates, inadequate supply of transport and communications infrastructure and complexity of tax regulations.

Some of these issues are addressed in the recent regulatory changes put forward by KDIPA, the MoF and other state entities, and have simply not yet had time to come into full effect. Furthermore, the government’s 2015-20 Kuwait Development Plan (KDP), under which the state plans to spend $155bn on a wide variety of projects, is expected to have a positive knock-on effect on Kuwait’s competitiveness, in terms of both attracting increased levels of FDI and boosting export diversification. “We are actually seeing real development on the ground now in terms of KDP progress,” said the GIH’s Ahmed. “This is what everyone has been waiting for. Assuming the plan moves forward as planned, across-the-board growth is widely expected to take hold for the foreseeable future.”

Taken together, the government’s recent FDI-focused legislative efforts and various other programmes aimed at diversification represent a substantive and timely shift in policy, one that has been widely hailed as necessary for maintaining economic growth in Kuwait moving forward. “The current push in terms of opening up the economy to FDI can be attributed to Kuwait recognising that now is the time to take action,” said the KBBC’s Hall. “And the government’s effort has already had a positive impact on the country’s economic environment. Indeed, Kuwait is increasingly seen as a bright light of investment activity in the region.”