As net hydrocarbon exporters, the countries of the Gulf Cooperation Council (GCC) took a hit in 2015 from the falling oil price, posing a threat to national budgets. But not all member states were exposed to the same extent, and the region as a whole is better placed than many other parts of the world to weather the storm and see an improvement during 2016.
The impact of low oil prices varied from one country to another, depending on the relative size of the economy and the management of cash reserves accumulated over the years when oil prices were soaring.
Fortunately for most Middle Eastern oil-producing countries, large reserves were accumulated and sovereign debt largely reduced. Saudi Arabia, for example, currently holds monetary reserves of about $650bn and has one of the lowest government debt-to-GDP ratios in the world, at 1.6 percent.
From a budgetary perspective, Kuwait, Qatar and the UAE are somewhat better placed than Saudi Arabia, Oman and Bahrain, which have higher break-even prices per barrel. The UAE is also in a unique position, with the most diverse economy in the region, and oil and gas contributing only 30 percent of total exports.
Looking ahead to 2016, perhaps one silver lining for Kuwait and other economies of the Gulf is that lower oil prices have forced governments to consider the introduction of new policies to help protect their respective economies, which could in turn mean they come out stronger as a result.
As with most other GCC countries, Kuwait must diversify away from its dependence on oil and the public sector needs to shrink. In the last 20 years, the economic share of the oil industry has soared while private investment remained sluggish.
Earlier this year, Kuwait approved a new five-year development plan for 2015-2020, budgeting around KD34bn ($116bn) in total. This is an extremely positive signal of intent, but the government needs to follow through quickly before its balance deteriorates further.
Like its neighbouring GCC countries, Kuwait needs to be on a path of sustainable growth, and the latest development plan may be the government’s best opportunity of reviving the corporate sector. With the long period of ultra-low interest rates approaching its end, pressure is mounting on Kuwait to act.
The drop in the price of oil has been an important reminder of the economic challenges Kuwait will face if it does not reform its economy soon. The country is finally in a situation where it can no longer rely as heavily on oil receipts to boost its economy, and that alone can be the ultimate catalyst for the economy to diversify and become more sustainable in 2016 and beyond.
In order to diversify its income streams, the government of Kuwait is carefully studying the introduction of a corporate income tax in 2016. Currently only foreign corporate entities are taxed on their Kuwait income, at a rate of 15 percent of net profits. Current plans foresee a flat 10 percent corporate income tax on net profit for all local and foreign entities.
And from a legal viewpoint, Kuwait has been extremely active in recent years in regards to the development of new commercial legislation and regulation, passing a raft of new laws to enhance its economy. This includes the Companies Law, the Commercial Licensing Law, the Direct Investment Promotion Law, the Public and Private Partnership Law and the long-awaited revised Capital Markets Law. Such significant strides should go some way in helping the attainment of Kuwait’s Vision
Plan 2035.
At the tail end of 2015, the new executive regulations of the Kuwait Capital Markets Authority were issued in a new and more fluid form, simplifying their concepts and rules and offering a more accessible tool for business. The 16 dedicated chapters promote standardisation for all rules, similar to other civil law systems. This approach is designed to provide a number benefits such as clearer guidance for the capital market users and investors.
These improvements to Kuwait’s legal system should go some way in increasing confidence and trust in its regulator and enabling a more attractive and competitive business arena in 2016, and for years to come.
Abdul Aziz Al-Yaqout, Senior Partner of Meysan Partners.
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