The Crisis of the Era: Economic Decline in Kuwait

Kuwait

Economy & Innovation

Commentary

Geoffrey Martin

Dealing with the impact of the COVID-19 pandemic over the next few years is going to be one of the most difficult tests for the Gulf Cooperation Council states. The economic effect of the pandemic is a combination of drop in oil prices, major losses in the private sector and entrepreneurship and consequently fiscal challenges. For Kuwait, this is the most difficult fallout since the Iraqi occupation in 1991. In my estimate, the impact will be far greater and may lead to the collapse of an already fragile private sector due to placid oil revenues, labor issues, and mass bankruptcy. Consider this an initial assessment of the economic consequences of the pandemic thus far.

The degree to which the pandemic wanes in the coming months is largely unknown, but at present, it continues without pause. As of June 18, there were 8,254 infected, 29,512 recovered, and 308 dead. Kuwait has one of the highest casualties per capita in the world, with 60 deaths per million. Curfew measures, which started as a public holiday on March 12^th have effectively closed all commerce. A five-phase gradual reopening plan proposed by the government to restart by mid-September is tenuous with strict measures still in place and phase one has already extended by one week due to an inability to contain infections. As we have sadly learned, there are no certainties anywhere to these types of predictions as the viral outbreak does not respond to economic imperatives.

A Continuing Fiscal Decline

Economic concerns are probably, in the long run, far direr as the pandemic could not come at a worse time for the Kuwaiti government. Kuwait’s fiscal position has already been shaken since the oil price crash in 2014, which saw Kuwait’s oil revenues cut by 60%. The oil price war in early March continues to endanger future oil revenues. While Kuwait was the first GCC country to cut production after OPEC negotiations in April, with a break-even price of $53-55 USD per barrel and production quotas remaining historically low and highly unstable, it is difficult to plan and implement government budgets for a country that relies on 90% of its revenue from crude sales.

This loss in revenue parallels high government expenditures focusing on investments in infrastructure to develop phase two of Kuwait’s Vision 2035 plans. Delays in restarting the Neutral Zone production field related to political and technical issues, slow development of the Al-Ritqa heavy oil field, and the Al Zour mega-project continue to suck up capital resources. Simultaneously, generous social benefits have climbed since 2010 and make up approximately 80% of the annual budget. Due to such low revenues and climbing costs, Kuwait has posted a fiscal deficit since 2015 and in January 2020, it has already projected a $30 billion deficit for the year.

Kuwait does have assets set aside for such serious fiscal situations. The Future Generation Fund (FGF) holds some $489 billion, according to ratings agency Fitch. Sources informed about fiscal policy told me the FGF will not be touched as the government is working on the public debt program, and is going to tap bond markets to buy a 20 billion dinar 10-year bond. Kuwait will get a very good interest rate due to market conditions and its very strong sovereign credit ratings, even though Standard & Poor downgraded the country to AA- recently. Kuwait also has $44.65 billion that remains in its General Reserve Fund, which will likely be entirely consumed. Other sources of funding from public-private partners, such as KIPCO, could also be used to shore up budgets by a few billion dollars, or alternatively the Kuwait Fund for Arab Economic Development could lend billions for housing projects. Kuwait Oil Company also has billions of dollars in profits that could be tapped, although political issues around all these sources of potential bailouts continue to fester. Other sources of potential income, such as an IPO for Kuwait’s Boursa stock exchange, will not materialize as Morgan Stanley Capital International officially delayed upgrading the Boursa to an emerging market–citing pandemic related issues–although there are deeper institutional issues at play. Highlighting the instability in the financial sector, the Kuwaiti Capital Market Authority canceled all trades on June 11, over a legal disagreement with the Kuwait Banking Association after it announced that its members would pay no cash dividends for 2020.

Yet substantial funds are not the only important tool necessary to deal with this economic crisis. Much depends on timing and how funds are funneled to the right areas of the economy to protect and shelter businesses and institutions from the storm. At present, minimal government stimulus efforts have taken place, meaning that the domestic economy has largely been left to feel the full impact of demand shock.

A Deepening Labor Crisis

With the complete absence of a swift and targeted relief package since March, several core issues within Kuwait’s economy have caused significant, perhaps irreparable, damage to the economy that will be felt for many years to come.

The first is a major labor crisis because of the recession. The expatriate population of Kuwait is likely to shed between 500,000 to 750,000 people in the next twelve months. While long term plans to address larger structural issues aim to reduce the percentage of the expatriate population to 30% of the total population, this will take years to implement and in the near term, only sows uncertainty within the wider business community. The only comparative demographic shift that comes to mind is the gap left by the expulsion of Palestinian expats after 1991, which left a massive bureaucratic and technical vacuum in the economy that has never been truly replaced or recovered from.

A huge number of blue-collar and white-collar expatriates will be leaving shortly. Blue-collar worker shortages will include maintenance staff, repair personnel, and drivers of specialized vehicles, many from India’s Kerala region. In India, economic, logistical, and political difficulties, not to mention the loss of billions in remittances, will likely make it difficult for many blue collars to come back to Kuwait when their skills will be needed to restart the economy. We are already seeing signs of what that labor shortage would look like. Lockdowns of the Mahboula and Jleeb Al Shouykh areas by security forces have badly impacted logistics and maintenance efforts in the country since April. A new lockdown announced May 31^st of Farwaniya, Khaitan, Hawally, Al Negra, and Maidan Hawally areas has further exacerbated attempts to restart the economy and gain access to specific manpower resources, especially delivery drivers. There is also already a steep decline in sources of high-skilled white-collar labor in Kuwait. White-collar losses include high-level managers, accountants, supply officers, marketing specialists, engineers, and IT staff. Both blue and white-collar gaps will be incredibly difficult, if not impossible, to fill in the medium-term. Highly-skilled expats, such as South Korean engineers are a particularly huge loss as they are major drivers of all mega-projects, especially Al Zour refinery.

Far more important will be the emotional impact of the past few months on all expats, which I think are akin to the traumas of war. Many have not been paid salaries since March and the sheer psychological cost of the curfews and lockdown will likely make many hesitant to come back to Kuwait after the pandemic ends, regardless of salary packages. One of the patterns I see in the crisis is a lack of trust in working overseas, especially for people above the age of 35, those with families, or health risks. In the near term, retaining non-national employees will likely be the greatest operational challenge for companies. In June, the government gave Kuwaiti nationals designated as Chapter Five (self-employed) or Chapter Three (employees) increased wage support from $2235 to $4470 for six months. For owners, this does little to alleviate greater concerns, as this amount would only cover rent (on average $2000-3000) and not salaries for non-Kuwaiti employees. Kuwaiti nationals make up only 19% of the private sector and there is no capacity to relieve coming expat labor losses from an operational sense for years, even if training were to start tomorrow. Despite general support from business owners, the present Kuwaitization quote-system is seen as a burdensome tax on business because of the associated higher employment cost; nationals as entry-level employees cost roughly 40% more than expats.

 Losing the Private Sector

Far more important in the long-term is the impact on Small and Medium-sized Enterprises (SMEs). There are 25,000 SMEs in Kuwait and although SMEs only contribute roughly 8% to Kuwait’s non-oil GDP, they are the foundation on which any post-oil transformation can occur in terms of entrepreneurial talent and skill. The biggest problem for SMEs has been rental contracts. With no government intervention or rent forgiveness for commercial renters, most businesses have been suffocated. Being contractually obligated to pay has broken the backs of most business owners since March. Part of the issue for landlords demanding rent is that the real estate market in Kuwait will likely completely collapse in the current economic downturn, and they know it. Again bad timing comes into play. For the last two years there has been an oversupply of commercial properties with up to 30% of all properties unoccupied. The commercial real estate has been hurting badly, with a 79 % drop in transactions and monthly sales averages falling from $171 million to just $1.3 million in October 2019. While the Kuwaiti government has promised soft loans and low-interest rates, this is likely too little, too late for SMEs due to the labor issues, capital decline, and sheer emotional exhaustion among owners and employees. For most owners the best decision will be to close; the demand shock and oversupply in the market will likely last for years. The fallout from the pandemic will only hurt this industry further, with global commodity prices likely to rise sharply by up to 50% over the coming year due to deepening global food security and logistical crisis.

Early reports corroborate this assessment. A report published on May 12 by Bensirri Public Relations (BPR) highlighted that out of 498 owners or CEOs of established companies that were profitable prior to the lockdown, 45% of respondents have suspended or shut down their business. Another 26% were on the verge of collapse after seeing their revenue drop by more than 80%. With full curfew enforced from May 11 to May 30, all businesses were further stifled with costs and no income. The vast majority of SMEs are still not allowed to open, with tentative plans for opening in September. Over the coming year, I think we will likely see a massive increase of bankruptcies and dissolutions in the SMEs, from 50-80%, similar to reports coming from Dubai.

To be intellectually honest about the seriousness of the situation means that I can offer no real solutions to these events but merely hope that by assessing and describing the economic damage, other policymakers can begin to pick up the pieces after the end of the pandemic. With world-changing behavior in terms of energy consumption already in full swing, developing a robust private sector and protecting the talent that exists within it, will be paramount for a successful future for Kuwait.

Geoffrey Martin is a Ph.D. student in Political Science at the University of Toronto, entrepreneur, and economic analyst based in Kuwait. His focus is on political economy, food logistics, and labor law in Kuwait and the wider GCC. He tweets @bartybartin