If there is a lull in the country’s parliament, you can bet there’s a good chance it will wreak havoc on the business community. And since a very thin line divides Kuwait’s private and public sectors, it’s easy for developments in one to spill over to the other.

That was the case in the closing days of 2008, when the Kuwaiti government announced a decision to back out of a $17.4 billion joint venture between Dow Chemical and Petrochemical Industries Corp. (PIC), a subsidiary of the state-owned Kuwait Petroleum Corp. A close-run thing, as operations were set to launch on Jan. 1.

Instead, however, Kuwait’s prime minister, Sheikh Nasser al-Mohammad al-Ahmad al-Sabah, said “opposition in parliament” was compelling him to cancel the agreement, which would have created the world’s largest maker of polyethylene. Since then, there has been a war of words on legal options available to the aggrieved party, Dow Chemicals, and much debate about what the future holds for ventures of this kind.

Kuwait’s decision has also thrown up further questions on the state of affairs in the country. It could have been just a case of holding on to its purse in uncertain times, or avoiding commitment to something they deemed unsustainable in the long term. In the words of banker and columnist Matein Khalid, “when the world is in recession the last thing it needs is an increase in petrochemical ca-pacity.” But the manner in which it was handled has also been called to question.

There are broader issues to consider. Were Kuwaitis really committed to the project when it took shape over a year ago? In July 2008, the two sides reported satisfactory progress and even discussed the project’s headquarters. Then in early December, they signed a “joint venture formation agreement and other key definitive agreements regarding the formation of K-Dow Petrochemicals.” What went wrong after that point is anyone’s guess. If the global business climate was not appropriate for such a venture, wouldn’t putting it on hold have been a better option than scrapping the deal completely?

Observers say political upheavals are making things worse for businesses in Kuwait. Khalid calls it, “a fundamental breakdown in the political system.” According to him, the country is not attracting enough foreign direct investment (FDI), and is dealing with depleting resources and a growing technology gap. On top of that, political turmoil is taking them nowhere. Recent reports of debt defaults involving some big companies have also dented investors’ confidence in Kuwait.

However, not everyone agrees that an unhealthy mix of politics and business is causing the country’s troubles. “Historically Kuwait did not have high FDI. If you look at the last five- to eight-year data, even though it is an issue and the government is trying to deal with it, it may be an issue but not the sole issue,” says Faisal Hasan, the head of research at Kuwait’s Global Investment House (GIH).

“Against the backdrop of distressed global financial markets and an ex-tremely weak outlook for the global economy, the Gulf Cooperation Council (GCC) macro picture for 2009 is going to be disappointing compared to recent years,” says Ala’a al-Yousuf, the chief economist at Bahrain’s Gulf Finance House (GFH), not to be confused with Kuwait’s GIH. His colleague, senior economist Hany Genena, says average aggregate GCC crude oil production levels are expected to post their largest annual percentage decline in more than a decade, while hydrocarbons export revenues are likely to fall by about 60 percent to $200 billion.

Kuwait is facing the same gloomy situation as the rest of the Gulf when it comes to the global financial crisis. The region’s economic boom, which began in 2003 on the back of high oil prices and allowed high government and private spending, has effectively ended. And so has the opportunity to splurge for both the public and private sectors. That’s leading to widespread austerity, and for Kuwait it may manifest in a rude sort of way.

   Email This Post      Print This Post