A Business Traveler’s Guide to...Kuwait

Located in the northeast corner of the Arabian Peninsula, Kuwait is one of the smallest countries in the world in terms of land area, despite being one of the world’s richest countries, based on GDP per capita. The country is mostly desert, with some fertile areas near the Persian Gulf coast, which means that there is virtually no agricultural industry (less than 1 percent of GDP is connected to local agriculture) aside from fishing.

OIL

Since 1946, Kuwait has become a major petroleum producer and oil now dominates this small, rich and relatively open economy. Kuwait’s oil industry accounts for 80 percent of government revenue, nearly half of GDP and 95 percent of export revenues. Additionally, over 60 percent of Kuwait’s workforce is employed in oil-related labor.

Kuwait has the second largest oil reserves in the world after Saudi Arabia, representing about 10 percent. Together the two GCC states hold 80 percent of the world’s known oil reserves. Kuwait also holds a modest amount of natural gas reserves. According to Oil and Gas Journal, in January 2009 Kuwait’s estimated natural gas reserves stood at nearly 63 trillion cubic feet (Tcf).

Recent reports by Reuters suggest Kuwait’s current oil production of 2.8 million bpd is expected to increase to four million bpd by 2020. To realise this production target, Kuwait Petroleum Corporation (KPC) plans to spend $51 billion between 2007 to 2012, to upgrade and expand the country’s existing refineries.

INDUSTRY

Aside from oil, services dominate the Kuwaiti economy and contribute almost 40 percent of Kuwait’s GDP. Currently, the service industry employs approximately 40 percent of the Kuwaiti workforce. Services also support the tourist industry and provide domestic labour in most Kuwaiti homes.

One of the major growth industries in Kuwait is technology. “Technology is growing, including telecommunications however, the markets are not completely open yet,” says John Enstone, a partner at Faegre & Benson LLP.

Given IT market compound annual growth rate (CAGR) forecast at 17 percent for 2006-2011, Kuwait is set to be one of the fastest-growing countries in the Gulf region, according to the Information Technology Report Kuwait. “This is due partly to its relatively small but tech-literate and wealthy population, which allows it to adapt faster to trends.”

Kuwait’s government is also investing in the growth and development of IT and communications, so most of the elements should be in place for Kuwait to outperform many of its regional neighbours as one of the fastest growing IT markets in the Middle East region over the next few years.

In absolute terms, Kuwait is the third largest computer market in the region, and the total size of the IT market is expected to increase from $406 million in 2006 to around $875 million in 2011.

“The pharmaceuticals industry has grown up in the Gulf now,” adds Enstone. Other high growth industries in Kuwait include automotives, food and drink, and infrastructure. Currently, many vehicles and finished products, such as clothing and food are imported primarily from the United States, Japan, Germany, China, South Korea, Saudi Arabia, Italy, and the United Kingdom.

FOREIGN INVESTMENT

According to the Kuwait Business Forecast Report, “a favourable tax regime, a booming economy and good infrastructure” bode well for the attraction of foreign investment in Kuwait.

However, the country is still ‘lagging behind some of its neighbours in terms of the broader regulatory and legal issues that interest private sector companies’.

Despite this, huge strides have been made in foreign investment in Kuwait. On February 3, 2008 Kuwait introduced a new taxation law allowing 15 percent tax for Foreign Direct Investment (FDI) and 0 percent for portfolio investment, slashing the rates foreign investors pay – this will increase the level of foreign investment in the market.

“The law also puts Kuwait on a par with other GCC states and, more importantly, any foreigner can freely buy stock on the KSE, whereas in some other markets of the GCC it is much more restrictive or just not allowed,” Nick Nicolaou, Chief Executive Officer of HSBC Kuwait commented in a recent interview with AME Info, a provider of online business information in and about the Middle East region. “It levels the playing field somewhat and I think because Kuwait has got the second largest stock market and the oldest stock market in the area, it will give confidence to foreign investors.

“Our HSBC research has recently issued a report showing that they like the GCC in general but they like Kuwait in particular because, from an evaluation point of view, it offers relatively good value. With this change in taxation law we know there are large institutional investors waiting in the wings that wanted this clarity before they invest, so it stands to reason that there will be an uptake,” Nicolaou commented.

THE FUTURE

However, the biggest risk to Kuwait is its dependence on oil. Indeed oil proceeds have been used to modernise infrastructure, create employment, and improve social indicators but this dependence means that Kuwait is vulnerable to any downturn in international oil prices — like many other Gulf states. Therefore, Kuwait needs to develop a viable non-oil related industrial base. This will be greatly helped by the introduction of the new taxation law, which will see a wave of new listings in the region, and, therefore, more diversification and privatisation.

According to Enstone, the attitude towards business will also change. “We are at the stage where the Middle Easterners are no longer prepared to be seen to rely heavily on the West and the East. With the change of presidency in the United States, the attitude in the Gulf is completely different to what it was a year ago; they want to work closely with the Americans particularly, but also the Europeans - they want to do so on the basis that they are not the junior end of the partnership.

“I think the big change that you are going to see is more and more of the Middle Easterners taking control of their own destiny and that will be exciting to see,” he concludes.