The Equate Group combines the Kuwait-based Equate Petrochemical Company and its subsidiaries MEGlobal, Equipolymers and The Kuwait Olefins Company (TKOC).
Kuwait, a Gulf nation of about 4.1 million people, may not garner as many news headlines as its bigger GCC peers Saudi Arabia and the UAE, but the country is fast gaining a reputation for its steadfast commitment to diversification. Indeed, Kuwait, like other nations that have relied on oil exports as their primary source of income, suffered as a result of the oil price crash of early 2016.
While the price of oil has picked up steadily since then, oil producing nations have been forced to adhere closely to policies designed to wean their economies off a heavy dependence on fossil fuels. Countries including Kuwait are proving that while difficult, this task is surmountable. Kuwait launched its National Program for Economic and Fiscal Sustainability (Istidama) in March of 2016, with the primary aims of diversifying the economy, increasing the private sector’s contribution and reducing the state’s fiscal deficit.
While it is still early days in terms of judging the success of the policies being implemented under Istidama, Antonio Carvalho, CEO of TICG and Partner, Oliver Wyman, appears to be impressed with the performance of Kuwait’s economy during the past couple of years. “Kuwait’s economy has proved quite resilient over the past two years despite the structural drop in oil prices that persisted since fall of 2014, which have impacted all GCC oil-exporting countries alike,” he says.
Furthermore, growth in Kuwait’s non-oil sectors is expected to hold up well under current conditions, with a nominal GDP expected around KD38 billion ($126.5 billion) in 2018 and support from strong government-led investments, according to Carvalho. He adds that this strong performance follows on from the Kuwaiti government’s national reform programme.
Antonio Carvalho, CEO of TICG and Partner, Oliver Wyman
In fact, Kuwait was able to record significant successes since inception of the national reform programme: for instance, the country improved its business environment through shortening procedures and curbing bureaucracy, resulting in a jump in the World Bank’s Ease of Doing Business index. On the fiscal front, Carvalho points out that the government has been effective at containing state expenditure through reforms, with actual expenditure reduced by KD3.7 billion ($12.3 billion) between 2014/15 and 2015/16 and budget ceilings set for the coming three years. Additionally, Kuwait’s first debt issuance in March 2017, was “a resounding success”, according to Carvalho. The issuance translated in a book size 3.6 times oversubscribed and had the lowest spreads across GCC at the time of issuance.
While the other Gulf countries are experiencing the same problems Kuwait is experiencing and are pursuing similar diversification plans, Kuwait’s vast reserves – accumulated over the past decades – offer an excellent cushion for the country in terms of pacing these reforms. “That is probably the key differentiating factor between Kuwait and other Gulf countries,” Carvalho says.
Moreover, with oil prices hovering between the $60-70 mark – far higher than during the immediate aftermath of the oil price crash of 2016 – Gulf countries have seen some of the pressure they were experiencing alleviated, allowing for more time to implement reforms.
While the price of oil has risen, this does not mean Kuwait and its Gulf neighbours can ease back on their reform agendas. Not only are these countries committed to recalibrating their economies, they are also aware that current oil prices cannot be taken for granted, as the surge in U.S. shale production has demonstrated.
The key challenges facing oil-dependent countries can be grouped into three main areas: An historical underdeveloped private sector contribution; an imbalanced national labour market, and a constrained fiscal budgetary situation, excessively dependent on oil revenues and based on a set of expenditures that are inflated in light of the new oil price reality. Further, this fiscal unbalance may become structural if not addressed conveniently and decisively over the coming years, according to Carvalho.
In the specific case of Kuwait, the private sector contributes to less than 30% of overall GDP and yet the government employs more than 80% of the Kuwaiti workforce – factors that influenced the government to embrace the current situation as an opportunity to design and implement a comprehensive economic and fiscal reform programme to address those challenges.
However, another set of challenges arises when attempting to implement these reforms. For example, implementing policies to increase the participation of nationals in the private sector is no mean feat, with the various tools available to governments each having their own pros and cons.
“Sustaining momentum will remain key to the reform success and may be an additional challenge given the recent oil price hikes,” Carvalho says. “Continuous cooperation between the government’s executive and legislative bodies, as well as key national economic stakeholders is the government’s utmost priority on the path to reforms and could be another relevant challenge.”
He also adds that a further drop in oil prices would naturally represent a significant challenge which will heighten the need for reforms.
The opportunities open to Kuwait revolve around using fiscal pressure from dwindling oil prices to advance the implementation of reforms and pave the way for a sustainable economy in the longer term. For Carvalho this entails sustaining the reform programmes that have already been launched to drive economic diversification, correcting labour market imbalances, and curbing the growth of government expenditure.
In terms of diversification of the economy, Carvalho says that the aim is to increase national and foreign private sectors’ contribution to the economy. This is to be achieved through the development of public private partnerships projects, fostering small and medium enterprises, as well as implementing the nationwide defined privatisation strategy. In addition to that, Kuwait’s government should also aim to diversify its public revenues to avoid the risks of heavy dependence on one source of income. Measures could include the introduction of taxes such as excise and value-added tax to start with, re-pricing certain public goods and services.
Attempting to correct labour market imbalances is a distinctly tricky exercise, but can be achieved with the right balance of strategies. Carvalho explains the procedures that Kuwait’s government will need to adopt and maintain: “In the public domain, government should gradually reduce the recruitment of new civil servants as more jobs will be offered to Kuwaitis in the private sector. In parallel, the government should also address the issue of containing the growth of the wage bill, by standardising jobs and functions, and simplifying cadres and wage components into a coherent and manageable set. Finally it should also gradually mandate the ranking of civil servants and their promotion rules to performance.”
On the other side, the private sector needs to start absorbing the new job seekers that no longer have a place in the public sector. Carvalho suggests that this should be done gradually and in parallel with other economic reforms that are designed to help the private sector to grow. “Alongside with that, there are other corrective measures that the government is considering for the private labour market such as curbing phantom employment and control abuse of benefits granted to employees,” Carvalho says.
Ganesh Mani CMA, CFA, financial consultant with RODL Middle East – Kuwait office
Ganesh Mani CMA, CFA, financial consultant with RODL Middle East – Kuwait office agrees, adding that there is also a chance for Kuwait to develop policies that help grow real opportunities in the private sector. “Supporting and funding SMEs would also help create opportunities for Kuwaitis. The startup scene has been invigorated by a couple of high profile exits that took place and it is crucial to maintain this momentum,” he says.
“Linked to the objective of providing economic opportunities would be investing in education. Investment in education would achieve objectives of equipping the locals with necessary skills making them attractive for private sector employers, supporting economic diversification, and developing knowledge intensive sectors like ICT,” he says.
In terms of the steps Kuwait should take to tap these opportunities, Mani suggests the government seeks to nurture entrepreneurship and innovation by developing an ecosystem made up of schools and universities, by providing institutional funding and organising events such as competitions.
“On the education front, the government could design incentives for the private sector in Kuwait to get involved in the skill enhancement of citizens, project entrepreneurship as an alternative to public sector employment, provide autonomy to educational institutions, and look at private and public sector partnership opportunities,” he says.
Returning to fiscal reforms, Carvalho insists that in a situation of deficit, governments should “lead by example”. This is something that Kuwait appears to be doing by curtailing spending through a stringent control of “expenditure buckets” such as events, hospitality, external missions and working groups’ compensation. “Process loopholes leading to wasteful spending are being corrected to decrease cost on items such as medical treatment abroad and social welfare. Additionally, control is being strengthened on how allocated budgets are spent across the year: budget reallocations are now regulated and line item expenditures are routinely reviewed to uncover improvement areas,” Carvalho says. “The main fiscal savings are expected to materialise from optimising the central government procurement function, and re-prioritising capital investments in alignment with Kuwait’s development plan.”
Mohamed Said El Saka, Deputy CEO & Acting CEO, Kuwait International Bank (KIB), discusses the changing landscape of Kuwait’s banking sector and how KIB is adapting and tapping opportunities.
Mohamed Said El SakaDeputy CEO & Acting CEO, Kuwait International Bank
How has KIB introduced alternative banking channels over the years? What are these channels and which have been most successful?
Recognising the rapid pace of technological change in the industry, KIB is striving to position itself at the forefront of banking technology in the region. As part of a comprehensive and long-term programme, we have been actively working to deploy services across different digital channels – online and mobile – to enhance and streamline our virtual banking experience.
Recently, one of the most important and most successful milestones under the umbrella of our digital revolution has been the inauguration of the region’s first-of-its-kind omni-channel contact centre. Operating around-the-clock, the centre includes an Interactive Voice Response (IVR) portal, and offers centralised monitoring, queuing, routing and reporting solutions, which provides customers access to most of our services via a visual interface; enabling us to offer a better self-service call experience.
What is KIB’s strategy concerning the introduction of innovative and new services?
At KIB, we aim at transforming the way we engage with our customers across every touch point and communication channel. The goal is to not only offer solutions with advanced technical capabilities, but to also provide latest digital solutions that are user friendly and easily accessible at all times. Our strategy is to develop and enhance all our banking channels, and as such we continue to embrace technology and innovation at the core of our customer-centric business strategy.
How is KIB adapting to the changing dynamic of Kuwait (fewer expats, diversification of the economy etc.)?
With the changing demographic structure, KIB is now more determined than ever to support the national workforce, as it believes this to be a key driver of national economic development. KIB aims at actively supporting and nurturing young talents within the local banking sector by continuously attracting aspiring young Kuwaiti professionals and providing a wealth of career opportunities and professional training programs for newly graduated nationals. We seek to encourage young aspiring professionals to pursue careers in the banking sector through supporting and developing student programs, as well as investing in our employees and promoting their professional growth.
Where do you see the most opportunities in Kuwait now, in terms of verticals and services?
Going forward, we can see several major trends that can create new opportunities for banks. The Kuwait market is no exception. There is a shift from digital quantity to digital quality, which means banks need to focus on improving usability and simplicity of existing digital banking offerings. Organisations must be fully prepared to deliver excellent customer experience across new channels to create a seamless multi-channel experience.
By incorporating more digital solutions, we will drive KIB towards becoming a more customer-centric business, delivering greater value to customers, and remaining relevant as a necessary extension to their everyday lives. We can also leverage data from digital banking platforms to build better customer relationships and segment customers into groups to better cater to their diverse banking needs.
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