Kuwait - business outlook abroad

Business America, Sept 25, 1989

U.S. Exporters are Having Success in This Market, and Are Now Close to Overtaking Japan As Its Top Supplier

Moderate economic growth rates in Kuwait should provide an expanding market for U.S. exporters. A competitive exchange rate for the dollar has also boosted prospects for U.S. exporters in recent years, as the United States has nearly drawn equal with Japan as the top supplier to the local market. The government budget remains the main engine of domestic business activity, as the ceasefire in the Gulf War has yet to generate much Kuwait-based business. Government spending will target essential services in the areas of housing, road construction, public utilities, education, telecommunications, and medical care. U.S. firms do well in areas where U.S. products have an edge in technology and price in this very price-conscious market. The U.S. Embassy in Kuwait filed this report.

The Kuwaiti economy grew an estimated 5 percent in 1988. The second year of renewed expansion after a long economic contraction increased output in both the oil and non-oil sectors. Expansionary monetary and fiscal policies helped fuel the expansion, although the wide variations in oil prices over the year introduced uncertainty about the contribution of the oil sector to future economic expansion.

Kuwait has remained an economy open to foreign trade and payments flows, although the traditional markets for re-exports to Iran and Iraq have been depressed for most of the past decade due to the war. The ceasefire in the Iran/Iraq war has not yet sparked the renewal of the re-export trade that many Kuwaiti observers had expected.

U.S. exports 1988--$690 million

U.S. imports 1988--$464 million

The Kuwaiti Government budget has remained stable at an expenditure level of around $10.5 billion for the past several years, with an effective control over outlays despite the economic retrenchment of the mid-1980s. The government's program of financing the budget deficit through the sale of bonds has continued to be successful. Monetary policy has tightened up after the previous policy of encouraging low interest rates led to a drain on foreign currency holdings of the Central Bank. With the increase in interest rates in December 1988, new investment outside the oil industry will be increasingly unlikely.

The banking sector in Kuwait enjoyed a good year for the most part, in 1988. The Central Bank continues to administer the so-called Difficult Settlements Program, which provides support to those commercial banks with a large portfolio of bad domestic debt left from the Kuwaiti financial crisis of the early 1980s. The inflation rate in Kuwait remained very low, with the Kuwaiti market basket showing little change in prices. The foreign trade account remained in surplus, although at a somewhat lower level than in previous years, but the balance-of-payments current account remained at about the $4.0 billion surplus level.

With proven oil reserves of more than 90 billion barrels, Kuwait will remain a major oil producer well into the next century. Kuwait was a founding member of OPEC, and its quota as of December 1988 was a little over one million barrels per day. The Kuwaiti Government has indicated, however, that it will produce oil at a rate of at least 1.35 million barrels per day. The Kuwait Petroleum Corporation, the government-owned corporation which is responsible for producing and marketing Kuwait's oil, has invested several billion dollars in establishing an oil refinery network in Kuwait, and Kuwait can now export upwards of 700,000 barrels of oil per day as product from its three domestic refineries. Kuwait also has a retail oil distribution network abroad, mainly concentrated in Western Europe.

The economy has been strengthened by measures adopted by the Kuwaiti Government in recent years to resolve the banking sector's bad debt crisis caused by the Souk Al-Manakh stock market crash of the early 1980s and the recovery in the oil market. Government budget outlays are also contributing to moderate economic growth. If the dollar stays in a competitive range vis-a-vis major European currencies and the Japanese yen, prospects for U.S. exporters of goods and services will continue to improve.

With the Gulf War ceasefire in August 1988, many local businessmen expected an economic boom and hoped to recapture traditional re-export markets to Iran and Iraq. However, normal commercial relations with Iran have yet to resume, and trade with Iraq has been limited due to Iraq's foreign exchange shortages. Until an actual peace treaty is signed, local businessmen and financial institutions will be unwilling to provide significant export financing. Even then, while economic growth in the region may accelerate, there is not likely to be anything approaching "boom" conditions.

Government spending remains the major engine of domestic business activity. Figures for the 1989-90 budget indicate that development spending will continue at current levels and will focus on social welfare projects with a high content of local goods and services. Spending will target essential services in the areas of housing, road construction, public utilities, education, telecommunications, and medical care. There should be sufficient project variety and volume to attract international contractors; design, engineering, and project management firms; and suppliers.