VZCZCXRO7712
PP RUEHDE RUEHDH RUEHDIR
DE RUEHKU #0619/01 1750959
ZNR UUUUU ZZH
P 240959Z JUN 09
FM AMEMBASSY KUWAIT
TO RUEHC/SECSTATE WASHDC PRIORITY 3522
INFO RUEHZM/GULF COOPERATION COUNCIL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS SECTION 01 OF 03 KUWAIT 000619 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB, NEA/ARP 
COMMERCE FOR INTERNATIONAL AFFAIRS 
TREASURY FOR INTERNATIONAL AFFAIRS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EPET KU
SUBJECT: KUWAIT ECONOMIC UPDATE - JUNE 2009 
 
REF: A. KUWAIT 79 
     ¶B. RIYADH 788 
     ¶C. KUWAIT 599 
 
¶1. (SBU) Summary and Comment: 
 
-Despite high profile defaults, Kuwait continues to be spared 
most of the ravages of the global financial crisis.  S&P 
recently reaffirmed its "AA-/A-1 " ratings, citing Kuwait's 
"robust external balances." 
 
-Current oil prices will likely produce a budget surplus for 
FY 2009-10. 
 
-The GOK's $5.2 billion "financial stimulus" law appears to 
be much ado about nothing.  Restrictive terms and weak 
incentives render the package unappealing to borrowers and 
lenders, respectively. 
 
-A slew of canceled energy and infrastructure projects has 
further exacerbated Kuwait's reputation as a frustrating -- 
and risky -- place to do business. 
 
End Summary and Comment. 
 
 
WEATHERING THE STORM 
-------------------- 
 
¶2. (SBU) Kuwait is weathering the global financial crisis 
relatively well.  While the IMF forecasts a 1.1% 2009 GDP 
contraction, Kuwait is not suffering the significant economic 
and social dislocation seen in the U.S. and other OECD 
economies.  With 90-95% of the Kuwait workforce employed by 
the state, concerns over rising unemployment are virtually 
non-existent.  With oil prices hovering around $60 and 
looking to edge up over the summer months, analysts -- 
including the IMF and the National Bank of Kuwait (NBK) -- 
anticipate that Kuwait will enjoy yet another budget surplus 
for FY 2009-2010. 
 
¶3. (SBU) Liquidity is not a problem for the GOK, whose net 
asset position is 250% of GDP, according to Standard and 
Poor's, which recently reaffirmed its "AA-/A-1 " ratings on 
Kuwait.  S&P also states that Kuwait's net external assets 
are close to 425% of current account receipts, "underscoring 
robust external balances."  Low stock prices notwithstanding, 
 Kuwait's banking sector has, for the most part, survived the 
global financial crisis intact.  Other than a modest infusion 
of funds into Gulf Bank (following currency trading losses in 
fall 2008) by the Kuwait Investment Authority, the GOK's SWF, 
none of Kuwait's banks have required Government bailouts. 
While balance sheets continue to remain fairly robust, some 
bankers acknowledge that more than a couple of Kuwait's banks 
may have negative exposure to some of Kuwait's troubled 
investment firms (e.g., Global Investment House and Dar 
Investment), the local real estate market and the ailing 
Al-Gosaibi and Saad groups in KSA (see below). 
 
¶4. (SBU) In numerous conversations, Post's interlocutors -- 
while lamenting the multitude of bureaucratic and political 
obstacles to enterprise and entrepreneurship in Kuwait -- 
acknowledge that business conditions in Kuwait probably 
helped to prevent the rampant speculation that has wrought 
such damage on Dubai's economy, which had been a destination 
for considerable Kuwaiti investments. 
 
 
WHITHER THE GOK'S FINANCIAL STIMULUS LAW? 
----------------------------------------- 
 
¶5. (SBU) The GOK's $5.2 billion financial stimulus package -- 
promulgated via Amiri decree in late March to boost corporate 
lending (ref 312 and 111) -- is living up to skeptics' 
predictions that it would be little more than a legislative 
white elephant.  More than a dozen sources in the financial 
services sector have told Econoffs that the law provides 
scant incentive for banks to increase lending to Kuwait's 
troubled investment companies and other ailing firms.  Some 
bankers also point out that the law's vague implementing 
regulations do not provide long-term assurances to lenders, 
i.e., the procedures for claiming GOK-sponsored guarantees in 
the event of defaults are poorly spelled out.  The head of 
one of Kuwait's largest investment companies said the law put 
too many onerous restrictions on companies seeking short-term 
relief and predicted that no financial services firms would 
 
KUWAIT 00000619  002 OF 003 
 
 
benefit from the law. 
 
¶6. (SBU) The failure of the new National Assembly (elected 
May 16) to formally ratify the law is also compounding banks' 
reluctance to lend funds under the provisos of the law.  The 
GOK promulgated the law via Amiri decree after the Amir 
dissolved Parliament in March and the newly elected National 
Assembly -- which is constitutionally mandated to approve or 
reject all such decrees -- had been expected to consider the 
law during the week of June 14.  However, increasingly it 
appears that such deliberations will be put off until after 
Ramadan, i.e., in September or October.  Meanwhile, MPs have 
resumed their calls for mass debt relief for Kuwaiti 
citizens, an oft-heard cry in the old Parliament (ref A). 
Earlier in the year, several GOK Ministers voiced opposition 
to such suggestions. 
 
KUWAIT OR "QUEUE AND WAIT"? 
--------------------------- 
 
¶7. (SBU) The cancellation of the K-Dow joint venture, the 
Al-Zour Fourth Refinery project and the Subiya power plant 
projects coincided with the release of data from UNCTAD, 
which showed a paltry $123 million of FDI in Kuwait in 2007 
(by far the worst showing in Middle East and North Africa). 
All this exacerbated Kuwait's reputation as a difficult place 
to do business, not least in the U.S. and East Asia, where 
large firms such as Dow Chemical Co., Flour Corp., GS 
Engineering & Construction (of Korea) and JGC Corp. (of 
Japan) all fell victim to canceled projects after making 
initial investments in such projects. 
 
¶8. (SBU) More than three dozen contacts in the Kuwaiti 
commercial and banking sectors told Econoffs that they shared 
foreign firms' exasperation with the business climate in 
Kuwait.  In most cases, our interlocutors highlighted the 
numerous bureaucratic obstacles to starting new businesses, 
buying and/or developing real estate and securing licenses 
and permits.  Such obstacles were usually described as being 
a combination of bureaucratic inertia and inefficiency, high 
turnover of Ministers, overlapping and competing 
jurisdictions of Ministries, and moderate corruption.  The 
interminable tensions between the executive and legislative 
branches of the GOK was also cited as a major obstacle. 
Finally, some businessmen from the old merchant families 
lamented the power now being wielded by senior bureaucrats 
from Bedouin families with "short" histories in Kuwait. 
(Note: The World Bank's 2009 Doing Business report ranks 
Kuwait 52nd out of 181 for "ease of doing business" and 134th 
for "starting a business."  End Note). 
 
¶9. (SBU) Several interlocutors told Econoffs that Kuwait's 
FDI inflows need to be viewed in the context of Kuwait's 
recent history, citing the Iran-Iraq war, the Iraqi invasion 
of Kuwait, Operation Iraqi Freedom and ongoing tensions 
between the Gulf's Arab states and Kuwait's neighbor Iran -- 
all of which have contributed to significant geopolitical 
risk perceptions.  (Note: S&P's recent rating reports also 
referenced such risk factors though the report noted that 
these were mitigated by Kuwait's "good international 
alliances."  Kuwait enjoys excellent relations with the U.S., 
the UK and France.  End Note). 
 
BANKS' NEGATIVE EXPOSURE 
------------------------ 
 
¶10. (SBU) International media have widely covered the 
financial troubles afflicting the Saad and Al-Gosaibi groups 
in KSA (ref B).  Local media reported that the Central Bank 
instructed Kuwaiti banks to cease dealings with the two Saudi 
firms.  Post's banking sector contacts confirmed that the 
Central Bank has asked local banks to declare their exposure 
to Saad Group and Algosaibi Group and expressed concern that 
they might need to increase their "extraordinary" provisions. 
 The extent of Kuwaiti banks' exposure is not clear at this 
time, though a contact at Gulf Bank indicated that his bank's 
exposure was "large." 
 
¶11. (SBU) Kuwait's largest investment company, Global 
Investment House, announced a major capital hike June 15, in 
an effort to raise funds to help pay off close to $3 billion 
in short- and mid-term obligations (ref C). 
 
********************************************* ********* 
For more reporting from Embassy Kuwait, visit: 
visit Kuwait's Classified Website at: 
 
KUWAIT 00000619  003 OF 003 
 
 
 
http://www.intelink.sgov.gov/wiki/Portal:Kuwa it 
********************************************* ********* 
JONES