Is Kuwait on the verge of an economic crunch?

Article Summary
The Central Bank of Kuwait has recently issued the 2015 economic report, highlighting some economic facts worth analyzing.

The Central Bank of Kuwait recently issued the 2015 economic report, highlighting some economic facts worth analyzing.

The report pointed out that gross domestic product (GDP) amounted to 40 billion dinars ($132 billion), registering 1.8% growth compared to 2014. However, GDP for the oil sector decreased by 1.7%, while it increased by 1.3% for non-oil sectors. The price for Kuwaiti crude [oil] for 2015 was $47.8 [per barrel (pb)], compared to $95.2 pb in 2014.

These data confirm that the oil sector, which contributes 58% to GDP, has significantly declined, but the added value for non-oil sectors was not sufficient enough to promote and stimulate economic activity, which means that the economy is still far from achieving diversification.

There is no doubt that the drop in price of Kuwaiti crude, from about $95 pb to about $48 pb, i.e., by almost 50%, was a major shock to an economy that has remained dependent on oil exports for a long time. The decline in prices could have more deleterious effects this year, because the price of a barrel of Kuwaiti oil is now $40 less than it was previously.

The report indicated that the country's population last year grew by 3.6%, after growing 3.2% in 2014. The percentage of Kuwaiti citizens rose by 2.5% [in 2015] compared to 2.7% in 2014, while the percentage of non-Kuwaitis rose by 4.1% compared to 3.4% in 2014. The number of Kuwaiti nationals amounted to 1.3 million, constituting 30.8% of the 2015 population, after having made up 31.2% of the population in 2014, while non-Kuwaitis totaled 2.9 million people in 2015, comprising 69.2% of the population.

The growth in the percentage of non-Kuwaitis is mainly linked to the labor market, which is still dependent on migrant workers. The report showed that the total number of workers in Kuwait reached 2.4 million in 2015 at an [average] growth rate of 3.3%, 2 million of whom were foreigners, making up 83% of the total number of workers, while only 400,000, or 7%, were Kuwaitis.

One can only assume that economic management was yet again unable to stimulate the local labor force to engage in the private sector, where expats mainly work, while the prevailing educational systems in Kuwait are still far from producing the labor market’s requirements.

Activity on the Kuwait Stock Exchange is one of the most important indicators of the Kuwaiti economy's performance. The report showed all trading activity indicators and price levels registering a significant decrease.

Trading value indicators fell by 35.2%, while quantitative indicators fell by 21.6%. Also, the general price index closed down, with a 14% drop from the 2014 closing level. The capitalized value of listed companies decreased to 26.2 billion dinars ($86.5 billion) with a loss of 3.5 billion dinars ($11.5 billion), or by 11.8% compared to [the figure from] the end of 2014.

There is no doubt that this decline represents a great loss for many investors who put funds in quoted instruments, which are often equity shares in companies listed on the financial market. A large number of these investors are middle-income earners or have limited savings and cannot find appropriate investments through which to exploit their savings other than company shares. The status of the Kuwait Stock Exchange is politically alarming and must be quickly addressed. Market performance did not improve during the current year, and this year's results are not expected to be rosy either.

Thus, based on these official data on the national economy, one may deduce that Kuwait faces the challenges of declining oil prices, the need to address the situation of various sectors and the importance of stimulating the various core activities in the oil and non-oil sectors. It must be acknowledged that the potential for recovery does not depend soley on the financial and economic policies adopted in the country, as the effects of the oil market and their developments in the coming months and years are surely more influential.

It is crucial to launch efforts to address important issues, including those related to the labor market, the rationalization of the recruitment of migrant workers and the need to stimulate the local labor force to engage in the private sector. All this is important in order to address demographic imbalances.

The performance of the Kuwait Stock Exchange must be improved. The stock exchange has adopted vital regulations and conditions on listing and trading activities as well as regarding transparency. This was especially the case after the creation of the Capital Markets Authority and the Boursa Kuwait Securities Company.

The requirements of the market must be met, including the establishment of companies acting in the capacity of market makers to promote vitality in this activity. The Kuwaiti economy requires serious review and confronting to regain its vitality.

Found in: economic downturn, capital market, stock exchange, population growth, oil prices, oil dependency, migrant workers

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