As Kuwait prepared to host the Arab Economic Summit last month, it was clear that this once venerable investor haven was screaming for its very own economic summit.
The bad news keeps rolling out from the investment corners of this otherwise impressive country. For where freedom of the press flourishes, democracy blooms and wealth abounds, it is sad to see that the investment climate lags behind.
For example, while the world has been busy with the global financial crisis, Kuwait has been busy with its very own crisis – a vendetta between successive elected parliaments and appointed cabinets that manifests itself economically.
Late last December, Kuwait cancelled a deal to form a US$ 17.4 billion petrochemical joint venture with US firm Dow Chemical after parliamentarians objected to the deal, despite it being months in the works. The deal would have seen Kuwait investing several billion dollars to build a manufacturing plant specializing in plastic bottles, compact disks, computers and agricultural compounds in Midland, Michigan. This in a country where up to 50 per cent of citizens employed in the public sector are effectively subsidized by the government as a means of oil dividends distribution that Kuwaiti economist Jassem Saadun calls “masked unemployment.”
The Kuwaiti parliament may have acted right in applying pressure on the government to terminate the contract, although doing so at such a late stage affected the Kuwaiti government’s credibility when signing future contracts. However, the Kuwaiti parliament is largely to blame for much of the economic woes that have plagued the country.
Since the late 1990s, successive parliaments in Kuwait have stalled discussions and approval of Project Kuwait, the government proposal to increase oil production in the northern parts of the country to boost Kuwait’s stagnant oil production that would have benefited from the rise in oil prices in the past few years. The parliament objected to what it saw as high foreign ownership levels and lower tax incent.es to foreign oil firms without presenting viable aiternat.es. The repeated objections caused the loss of valuable opportunities for the country, while its sister GCC countries expanded oil and gas production and output. Stalling Project Kuwait, which would have created real employment opportunities for the younger generation, may have even encouraged the government to turn its attention to investing abroad in order to secure a revenue stream for the future.
The parliament constantly occupies itself with socio-political issues that result in the government tendering its resignation several times, only to re-form pretty much as it was, sans one or two ministers. The Emir is then prompted to dissolve the parliament and call for re-elections that have to approve the new cabinet. This cat and mouse game has been going on in light of global challenges that require a steadfast and stable government in place, if only to deal with the issues that face the country. For how can it be possible that in 2009, the country with what is perhaps the most mature stock market owing to its large investor base, diversified equities and relatively transparent nature in the region still has no official stock market regulatory authority.
Syria, where no stock market existed at the time of going to press, actually has a stock market regulator. Kuwait does not, despite stock market activities going back decades. The resulting lapses in stock market regulation have resulted in investment firms operating as banks and offering investment banking services such as corporate finance, in addition to real estate firms operating as investment banks by lending money without fulfilling minimum reserve requirements. This laissez-faire attitude has contributed to the collapse of Gulf Bank, the GCC’s first victim of the global financial crisis, whose demise was only offset by a generous government bailout.
Ironically, barely a week before Kuwait was due to host the Arab Economic Summit, the country had no approved government due to the cabinet and parliament not agreeing on the post of the audit bureau chairman. The deputy parliament speaker Roudhan Al-Roudhan commented that Kuwait “has to gain political stability before the Arab Economic Summit.”
I say Kuwait has to gain political stability, period. The perpetual disagreements between the successive parliament and the cabinet resulting in the procrastination of establishing a stock market regulator prompted Kuwaiti investors to take matters into their own hands as they saw several days of large declines last autumn. For example, a court order brought forward by investors resulted in the stock market suspending its activities for several days. Kuwait’s parliament and cabinet must learn to focus on their country’s well being and probably convene their very own internal economic summit to fast track the country’s development. Projects have been delayed, companies have gone bust, unemployment continues to rise and credibility has been lost. And no generous bailout package can fix that problem.
This article originally appeared in the February 2009 issue of MONEYworks. (PDF Download)