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BankingKuwait’s tightly regulated banking sector is one of the most developed and sophisticated in the region, with its banks enjoying some of the best credit ratings in the Gulf. Only 10 local banks provide retail banking services, and the sector remains largely closed to foreign competition - although licences have been given to a handful of international banks, they are unable to open more than one branch. Unlike elsewhere in the Gulf, Islamic banking has been slow to take off in Kuwait, partly due to a strong appetite for conventional banking from locals, but also because only three banks - Kuwait Finance House, Boubyan Bank and Kuwait Real Estate Bank - are licensed to provide Islamic banking services - a bone of some contention amongst other banks. The sector is tightly - some say too tightly - regulated by the Ministry of Finance and the Central Bank of Kuwait, with banks closely monitored and often restricted by what they can and cannot do. Several financial firms have requested licences to start retail operations, but have been prevented from doing so. Nonetheless, the sector’s strong fundamentals have meant that it is one of the few in the region this year to have grown following the stock market meltdown last year.
Financial MarketsThe Kuwait Stock Exchange (KSE) is the oldest and most sophisticated stock market in the Gulf. Until 2012, Kuwait was largely self-regulating and the only Gulf state not to have an independent financial regulator, but it has now established the Capital Markets Authority (CMA). This replaces the old three-pronged system of regulation by the Central Bank of Kuwait (CBK), the Commerce & Industry Ministry and the KSE. The Kuwaiti authority is independent, but ultimately answerable to the government. The new structure includes a special stock exchange court and licensing systems for brokers, assets managers and funds operating on the bourse. And, for the first time, Kuwait has established rules that specifically prohibit money laundering and insider trading. The value of trades on the KSE in May this year - at a mere KD654.7m in share sales and purchases - was less than a quarter of those in October 2008, just before the global financial downturn. This is an indication of the distance yet to be travelled for Kuwait’s capital markets to regain their momentum.
IndustryKuwait has a relatively small industrial sector centred around the Shuwaikh and Shuaiba industrial areas. Most of it is light industry, although the state does have the region’s only catalyst manufacturing plant. There are also two cement producers; Kuwait Cement Company and Kuwait Portland Cement. PetrochemicalsA lack of gas feedstock has hampered the development of a local petrochemicals industry, with ethylene production standing at just 1.6 million tonnes a year (t/y) compared to 12 million t/y in Saudi Arabia and 2.9 million t/y in Qatar. Nor is there much prospect for a significant capacity increase. Unlike in the UAE and Qatar, no new petrochemical capacity is at the implementation phase in Kuwait. A joint venture of the US’ Dow Chemical Company and state-owned Petrochemical Industries Company (PIC), Equate has been a huge success story for Kuwait accounting for 60 per cent of its non-oil exports since it was set up in the late 1990s. Feedstock constraints will continue to limit Kuwait’s domestic petrochemicals ambitions. As a result, much of PIC’s focus will be on developing and securing capacity overseas. This drive, initiated with the establishment of the MEGlobal and Equipolymers ventures, suffered a setback with the collapse of the K-Dow venture in late 2008. Undeterred, PIC is now working with Kuwait Petroleum International (KPI) to develop an integrated petrochemical and refining complex in China.
Construction and real estateKuwait’s construction boom was kick started by the US invasion of Iraq and the subsequent basing of many international firms in the state to take advantage of the post-war situation. Real estate prices have risen since then, helped also by the lack of available land and a shortage of housing. The government hoped to rectify that by building whole new cities such as the $77bn Silk City project in the north to provide jobs and more affordable housing stock as well as diversify its economy. However, so far the schemes have failed to progress. The Silk City plan is to create a new metropolis on uninhabited land in Subiya, on the northern side of Kuwait Bay. In March 2006, the City of Silk development was unveiled by UK-based Eric Kuhne & Associates, but it has essentially gone nowhere since then. In January 2011, the project was formally put on hold, pending a review by Canadian firm Malone Given Parsons and the local Gulf Consult. It is unclear whether the scheme will go ahead. Nearly all construction activity in Kuwait is carried out by local firms. Many have expanded rapidly over the last four years, and are now looking to expand into other Gulf states.
PowerRecently, Kuwait has had to contend with peak power demand growth of 6-8 per cent a year, which has been driven by an expanding economy and population. This growth, coupled with a lack of new capacity being installed in the period 2000-06, placed an increasing strain on the sector: in 2009 and 2010, Kuwait’s power reserve margin fell below 5 per cent, well under the internationally accepted standard of 15 per cent. As a result, there were genuine fears that Kuwait was facing serious electricity shortages in the summer months. In addition to having to replace existing infrastructure, some 10,000MW of new capacity will be required to meet the projected 2020 load. Unlike most other Gulf states, Kuwait still hangs on to the conventional government-funded model for its power and water developments. Extensive work on the transmission and distribution network is also required.
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