Kuwait Defence and Security Report Q2 2009

The economic outlook for Kuwait has deteriorated markedly over the last quarter, with oil prices having fallen further, production set to contract under the new OPEC quotas and the financial sector having seen some significant turmoil. We expect the expatriate population to shrink as jobs go (reducing the number of consumers), and personal wealth will contract in line with stock market and real estate asset losses. The government stimulus package will go some way towards keeping the economy afloat, in line with the view we have been promoting for a while for the whole of the Gulf region, but nonetheless, we expect the economy to contract by 1.0% this year, and recover only slowly going forward, as the unappealing business and political environment keeps investors away.

The Kuwaiti government is under increasing pressure to deal with the economic turmoil, and, as parliament becomes even more angry with the government, this could lead the latter to make some potentially damaging decisions. There is also a risk of early elections: new polls are not due until 2012, but Kuwait has a history of dissolving governments. It has had four parliamentary elections since 1999, and we would not be surprised to see new polls called in 2009 or 2010. While we would not expect this to result in any meaningful change of government - parliament is already dominated by the opposition and the royal family is not about to be overthrown - it could destabilise the country, delay reforms, deter investors and lead to even further fiscal laxity.

Kuwait has traditionally relied upon foreign sources for arms and equipment, and is likely to continue to do so in the foreseeable future. The West’s interest in Kuwait, due to its geo-strategic position and pro- Western outlook, has allowed it to receive large quantities of advanced high-technology weapons systems from some major supplier countries such as the US, the UK and France. Kuwait lacks an indigenous defence industry of significance, and its armed forces are almost entirely reliant upon procurements from foreign sources for equipment and training. US foreign military assistance will continue to dominate Kuwait’s imports trade, with the vast majority of its arms procurements being supplied by US-based companies. In recent news, Kuwait has also opened discussions with France over the procurement of military materials and the development of Kuwait’s nuclear energy sector. Kuwait is also increasing its regional security ties, and recently entered into discussions with Bahrain.

We anticipate that the Kuwaiti government will continue to increase its defence spending, and have retained our projection that this will likely grow at 5% annually, in real terms, over the coming years. We expect that defence spending will also grow as a proportion of GDP, reaching 1.8% of GDP by 2012.

These increases will depend in large part on how the economy respond in the face of the global financial crisis and downturn in oil prices.