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SOLID PERFORMANCE
Performance has been solid in
recent years due to higher oil and non-oil activities. GDP growth was
strong and inflation low. Kuwait recorded large fiscal and external
accounts surpluses. The stock price index more than tripled since 2003.
This economic success will be maintained in 2007 driven by sustained
high oil prices, a slight up tick in oil export volume, and rising FDI
associated with oil field expansion plans. The outlook is strong, even
if reforms are slow, due to projected strong world oil prices and future
plans for the hydrocarbon sector. Kuwait has a US$22bn plan to expand
oil capacity to 3mn b/d by 2008 and double the production of
petrochemical products. The new legislation passed in 2003 that allows
100% foreign ownership targets boost in FDI in the years ahead.
Economic Growth
Due to the buoyancy of world oil prices and strong non-oil activity,
Kuwait’s economy strengthened further since 2004. GDP growth averaged
7.5% a year. GDP per capita jumped to US$ 30,188 in 2006. Current oil
production is about 2.6mn b/d. Kuwait’s economy remains heavily
dependant on its oil sector. Oil accounts for roughly 60% of GDP and
90-95% of government revenues. Current oil production capacity is
estimated at 2.6-2.8mb/d, but plans are in the works to boost capacity
to 3mn b/d in 2008
Fiscal policy
Kuwait has enjoyed sizeable budgetary surpluses dating back to 1999. The
budgetary surplus jumped to 40% of GDP in 2005 and 43% in 2006. This is
remarkable by international standards. This has been due to
significantly higher oil prices combined with larger oil output (above
quotas) resulting in much larger government revenues. Kuwait has the
dilemma of how to “best manage” larger than expected oil windfalls. The
surge in oil prices and in liquidity, which combined with speculation,
has led to frenzy in the stock market. Profits in companies have been a
reflection of capital gains on stock investments. Fortunately, the
financial system (strong bank capitalization) is well equipped to
withstand a reasonable correction.
The current account surplus
will remain significant in 2006-07 along side a minimal external debt
load. Kuwait also has fairly sizeable external financial assets
estimated at US$100bn and providing also decent non-oil income stream.
The external current account could move into deficit should oil prices
drop below US$18-20/bbl. However, this is not anticipated in the
foreseeable future. Medium- term growth prospects remain linked to
international oil prices, which for the moment appear to favor Kuwait.
It has managed to maintain price stability. However, buoyant economic
conditions have led to higher inflation of 4% in 2005 and 2006 despite
subsidies.
Investment Environment
Kuwait is increasingly adopting a more welcoming attitude towards
increasing foreign direct investment. The implementing regulations of
Kuwait’s March 2001 Foreign Direct Investment Law was approved by the
Kuwaiti cabinet in 2003. The law provides for a range of investment
incentives. The Kuwaiti cabinet is also currently discussing a draft law
which cuts corporate tax rates from 55% to 15% for foreign entities
operating in Kuwait. Given the ongoing struggle between the National
Assembly and the government over a number of issues including economic
reform, foreign investors should expect more delays in the passage of
the longawaited multi-billion dollar Project Kuwait bill which promises
to open up K uwait’s upstream oil sector
to international oil firms.
Progress continues on the
structural reform front, albeit at a slow pace. Private sector
participation in the sectors previously dominated by the public sector
has increased (particularly in telecommunications, airlines, and
infrastructure development). However, several draft laws (including the
privatization and competition laws) aimed at promoting a more
market-friendly business environment are awaiting parliamentary
approval.
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