Kuwait is one of the world’s smallest yet richest countries. A proposed fiscal and financial market overhaul aims to tap its growth potential beyond oil and gas.
For at least a decade, one of the Gulf’s most democratic monarchy has been paralyzed by a political tug-of-war between leaders pressing to open the economy and those who would prefer to preserve a tightly controlled oil-rentier state. Today, the deadlock appears to be breaking.
Last month, Mohammad Sabah Al-Salem, Kuwait’s new prime minister, presented his government’s action plan to Parliament, including a package of fiscal and economic overhauls. The emirate, he said, can no longer “sustain a welfare state solely on depleted natural wealth.” The measures under discussion include allowing Kuwait to borrow on the international markets; letting commercial banks into the market for property loans, ending a monopoly long enjoyed by Kuwait Credit Bank; and widening the tax base with new corporate taxes on local companies.
While most countries in the region are diversifying away from oil and gas, such sales still account for over 90% of both exports and revenue in Kuwait. Civil service wages and subsidies for FY 2024/2025 reportedly will make up 79.4% of public spending. Any threat to Kuwaitis’ somewhat cossetted lifestyle is bound to provoke controversy; but the new prime minister, who had held several state positions before resigning in 2011 to protest corruption, is reportedly popular among Kuwaitis, even in influential financial circles.
The country’s economic growth typically mirrors global energy market fluctuations. When oil prices were high in 2023, GDP recorded an 8.9% increase, according to IMF data. Last year, amid OPEC+ production cuts, it barely reached 0.1%. But the emirate’s oil and gas reserves have historically been a strong safety net, and it has plenty of funds for stormy weather.
“Kuwait’s financial institutions stand out not only as some of the largest and most resilient in the region but as some of the most profitable as well,” says Salah al-Fulaij, Kuwait CEO of National Bank of Kuwait (NBK), the country’s oldest bank and second-largest lender, with over $120 billion in assets.
The emirate’s juggernaut is the Kuwait Investment Authority, one of the world’s biggest sovereign funds, with over $800 billion and a net asset position that averages 470% of GDP. Local banks, both conventional and Islamic, are also exceptionally well capitalized and profitable. “The banking sector is a cornerstone of the economy,” says Ali H. Khalil, CEO of the Kuwait Financial Centre (Markaz), an asset management and investment banking firm. “This financial robustness not only cushions [the banks] against market volatilities but also positions them to capitalize on growth opportunities.”
Besides having its pockets full, Kuwait handles money with care. Citing “strong prudential oversight by the central bank,” the International Monetary Fund, in its latest Article IV mission statement, notes that “the impact of global banking sector turbulence on Kuwait’s banks has been muted.”
Kuwaiti lenders recorded strong financial results last year, notes Abdulwahab Al-Rushood, acting group CEO of Kuwait Finance House (KFH), the emirate’s biggest bank, which posted a record $1.5 billion profit in the third quarter (see sidebar, page 80). Banks also “showed strong financial-soundness indicators in terms of asset value, capital adequacy and liquidity ratios,” he says.
According to Central Bank of Kuwait (CBK) data, local lenders chalked up a collective 46.7% in year-on-year net profit growth for the first nine months of 2023, while their overall capital adequacy ratio stood at 18.3%, liquidity coverage at 178.2%, and net stable funding at 112.5%. These are “well above required ratios,” the regulator reports. Nonperforming loans were low, at 1.7%. “The Kuwaiti banking sector is able to face future challenges from a position of strength on the back of a more supportive economic environment,” says Basel A. Al-Haroon, governor of the Central Bank of Kuwait (CBK).
Fiscal And Structural Challenge
While the emirate has the coffers to stomach external shock, the CBK is one of the parties pushing for economic changes. “Large financial assets underpin Kuwait’s economic resilience, but these assets alone cannot substitute for the fiscal and structural reforms that would offset the risks of lower oil prices, low oil demand in the future, and rising marginal cost of production,” the World Bank warned in 2022.
The new prime minister’s government, appointed in January, was Kuwait’s ninth in four years; but if observers in finance are right, the ninth time might be the charm. As the minister of finance, former banker Anwar Al-Mudhaf raises particularly high expectations from industry stakeholders. “The stock market has reacted positively,” Markaz CEO Khalil notes. “The government’s new initiatives to diversify the economy are particularly favorable for the banking sector. By broadening the economic base, these initiatives will likely lead to increased business for banks.”
The new team also signals an “optimistic outlook” for NBK’s al-Fulaij. “Proactive stance on fiscal and structural reforms is expected to enhance economic stability and diversify revenue sources beyond oil,” he says. “Increased political stability and cooperation between the government and Parliament bode well for the swift implementation of crucial reforms, improving the overall investment climate and fostering a more conducive environment for businesses.”
The long-awaited new debt law, allowing Kuwait to access international debt markets, “would provide a structured approach to managing public finances and ensure prudent fiscal operations, issues the rating agencies have regularly highlighted as a weakness in their assessment of Kuwait’s sovereign ratings,” al-Fulaij says.
The new mortgage law could also be a “significant growth catalyst,” says Khalil. CBK data places total loan facilities in Kuwait at around 50 billion Kuwaiti dinars (about $162 billion). With a backlog of some 140,000 home applications for an average anticipated loan of 90,000 dinars per home, the retail loan book is expected to surge by some 12.6 billion dinars, Khalil notes. “This law will result in an annual loan growth of 5.25% incrementally over the current organic growth. Banks expect their loan volume to surge; but they remain unsure how that will translate into profits, since the new rules around mortgage pricing remain to be decided.
The government’s pledge to enact new corporate taxes on local companies follows Kuwait’s adherence in November to the OECD/G20 framework on Base Erosion and Profit Shifting.“Widening the tax base may impact corporate profits but will have a net positive impact on businesses, as the additional government revenue would be deployed in Kuwait’s non-oil sector,” Khalil predicts.
Boosting Investor Confidence
The fiscal and financial market restructuring dovetails with efforts dating back several years to attract foreign direct investment (FDI) by turning Kuwait into a trading hub connecting Europe, Asia and Africa—not unlike neighboring Dubai. To encourage capital transfers, Kuwait concluded the privatization of its stock exchange in 2019, prompting both MSCI and FTSE to upgrade the emirate’s status to emerging market.
“As Kuwait continues to develop and diversify its economy, investors are drawn to the opportunities presented by this dynamic and promising market,” says Talal Bader Al-Othman, vice president of asset management at ABK Capital.
According to the UN Conference on Trade and Development, Kuwait’s FDI inflow grew by 16.8% annually, to $758 million in 2022 from $348 million in 2017, but that number remains below target. Last year, FDI weighed only 0.2% of GDP, nine times lower than the regional average. Al-Othman, however, is optimistic. “Since the start of 2024, we have witnessed a significant upswing in investor interest,” he notes.
A New Regional Banking Power
A year and a half after its $11.6 billion acquisition of Bahrain’s Ahli United Bank (AUB), Kuwait Finance House (KFH) is putting the finishing touches to the merger.
Late last year, the Central Bank of Bahrain approved AUB-Bahrain as a licensed Islamic lender, completing a conversion process that had begun several years earlier. The bank will now offer products and services compliant with Shariah law prohibiting interest-based loans or investments in activities like gambling or alcohol. In January, KFH also received approval from the Capital Markets Authority of Kuwait to execute the merger by amalgamation between KFH and AUB-Kuwait.
Sealed in 2022, the KFH-AUB merger was the region’s first cross-border consolidation. The deal creates the largest bank in Kuwait and the second-largest Islamic bank in the world, with $120.8 billion in combined assets.
