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Kuwait Projects: KWD 10bn Awarded - Where is the trickle-down effect?

Date : 25/04/2016
Author:  Marmore MENA

Kuwait Projects

According to Marmore’s recently published report on Kuwait Projects, in 2015, Kuwait awarded projects worth KWD 10bn, an increase of 20% compared to 2014. The aggregate value of projects awarded during 2014 and 2015 was KWD 18bn. However, this is yet to impact positively on key areas of the economy.




As of Q1 2016, there are 420 ongoing projects in Kuwait, 19 projects valued at KWD 34bn (USD 112.2bn) placed on hold and another 20 projects valued at KWD 7bn (USD 22.1bn) shelved. Some of the key areas that were expected to be positively impacted are the banking (liquidity & credit growth) and capital markets (debt & equity).  However, the awarding of projects is yet to create any impact on capital markets and had a marginal impact on banks’ credit growth. Bank’s credit, which was expected to be significantly impacted, grew with 8% increase in credit growth at the end of 2015 compared to 2014. And, the corporate earnings in Kuwait have contracted at the end of 2015 compared to 2014. All these factors ascertain that the awarding of projects during 2014 and 2015 is yet to stimulate the growth of the Kuwaiti economy as anticipated.
 
The reasons highlighted in the report for the absence of tangible effects of these projects are:
 
  1. In the current situation, much of the projects went to contracting and construction companies rather than PPP. A PPP focused project awards can have quick pass through effect benefitting many legs of the economy.
  2. Duration taken for the projects to be completed: Considering some of the largest (in terms of value) projects completed during the 2012 to 2015 periods, the average duration taken for these projects to be completed was 5 years
  3. The contra effect of the low oil price on economy: As the positive effect of the projects awarded is weathered by the negative impact of low oil prices on the economy
  4. Projects awarded are skewed towards oil & gas sector - A majority of the completed projects are from oil & gas sector and since Kuwait is an oil-dependent economy, the economic significance of these projects is high. However, given the lower oil price prevailing since mid-2014, this would not have resulted in expected level of revenue generation
 
Some of the trends summarized in the report are that projects awarded are showing signs of growth with the increase from KWD 3bn in 2012 to KWD 10bn in 2015 and the decline in oil prices hasn’t significantly impacted the project’s landscape in Kuwait.
 
A sector wise assessment indicates that the real estate sector is the most dominant segment for projects in Kuwait with the highest number of ongoing projects (154) worth KWD 37bn. However, Oil & gas, power & water sector projects accounted for 74% of projects completed (by value) between 2012 and 2015. As far the new projects are concerned almost 50% of the projects signed in 2015 belong to the oil and gas sector. A majority of the ongoing projects in Kuwait are in the early stages of execution.
 
The Kuwait Authority of Partnership Projects (KAPP), is expected to award PPP projects worth KWD 2bn (USD 6.6bn) in 2016 and as of Q1 2016, there are 22 ongoing projects from real estate and power & water sectors. The Al Zour IWPP is the largest ongoing PPP project in Kuwait.

Tags:  Infrastructure, Kuwait, Power, PPP

Ratings:
 Current rating: 5 (3 ratings)

Kuwait Petrochemicals

Date : 11/02/2016
Author:  Marmore MENA

Kuwait-Petrochemicals.jpg

Petrochemicals Industries Company (PIC) is the major player in Kuwait petrochemicals sector. Petrochemicals Industries Company (PIC) was established in 1963 by the orders of Amiri decree. PIC is one of the few low cost manufacturers of petrochemicals in the world owing to cheap feedstock costs. Located in the GCC region with excellent port facilities and its geographic location being a strategic advantage, PIC enjoys competitive advantage over other players in the world.

PIC’s goal is to prove its efficiency and capabilities in the Petrochemical sector through Joint ventures and construction of mega integrated refining and petrochemical projects in Kuwait and in other countries. According to Marmore’s Kuwait Petrochemical report, PIC plays a major role in the effort of the Kuwait government to diversify its exports from Oil and Natural Gas.

Oil-Fields-in-Kuwait.jpg


Petrochemical projects worth USD 337.7 Bn (Zawya) are planned to be executed in Kuwait between 2009 and 2017. The Olefins-III project in Shauiba Complex of Kuwait worth USD 7,000 Mn is the major project of PIC and is expected to become operational from 2017 or 2018. Al Zhor refinery project worth USD 30 Bn was signed in October 2015 which will help in capacity addition of Naphtha feedstock for petrochemical plants after its expected commencement in 2018.

Figure-Oil-Reserves.jpg


Petrochemicals demand deteriorated during 2008-2009 due to the global financial crisis. Demand recovered after 2010 when the economic growth rates increased, especially in the emerging Asian markets like India and China.

According to Marmore’s Kuwait Petrochemical report, increased demand forecasts for paints, electronics and fertilizers in India and China during the period 2015 to 2018 is going to be a key driver for the Petrochemical companies in Kuwait as petrochemicals are the major raw material for the manufacture of paints, electronics and fertilizers.

Chinese self-reliance in the production of petrochemicals is a cause of concern for PIC as China is the major export destination for Kuwait’s petrochemicals. To mitigate the risk, PIC entered into joint venture in China for the construction of the China Integrated plant at Zhanjiang province which is expected to become operational from 2017.

The domestic demand for oil and natural gas is increasing due to increasing population and increased demand for electricity. The shift to heavier feedstock like Naphtha eliminates the cost advantage PIC enjoyed with the subsidized supply of Ethane. Increasing feedstock costs will eliminate the competitive advantage enjoyed by PIC over other petrochemical players outside the GCC region.

PIC has carved out three Horizon plans for the development of the petrochemicals sector in Kuwait. PIC is working towards realizing its Horizon plan –III from the year 2000. Streamlining investments into refining and petrochemical integration, entering into more number of joint ventures and diversifying the product portfolio with the help of timely government initiatives will help PIC to handle the challenges and achieve its goals set as a part of the Horizon plans.

Tags:  &, Economy, Gas, Kuwait, Oil, Petrochemicals

Ratings:
 Current rating: 0 (3 ratings)

Kuwait Economic Themes & Investment Implications 2016

Date : 31/01/2016
Author:  Marmore MENA

Kuwait Economic Themes & Investment Implications 2016

Prices for crude oil have fallen by over 65% since mid-2014. With most investment banks and international agencies, including World Bank and IMF, expecting the lower oil prices to persist throughout 2016, the prized surplus of fiscal and current account positions is expected to detriorate to low single digits for Kuwait.

Kuwait EconomicThemes and Impact on Investments

According to Marmore’s Kuwait economic themes report, Kuwait continues to be extremely reliant on oil for revenues. On an average, hydrocarbon revenues accounted for c.80% of overall revenues in the past five year period (2009-2014). While part of the oil revenue is saved as sovereign wealth fund, most is channelled to the local economy in the form of wages for public sector employees, large scale subsidies (energy, electricity and water), capital transfers and generous grants for its citizens.

Though some measures was warranted in part to mitigate the effects of global financial crisis and alleviate the rising social pressures, the deteriorating fiscal situation amid the lower oil price environment warrants relook at ways to augment revenue streams and curb wasteful expenditures. The slump in oil prices, has renewed focus on containing current expenditures, prioritizing capital expenditures and introducing measures to rationalize subsidies.

The Government of Kuwait must capitalize on the opportunity offered by low oil prices to contain expenditures, which are skewed towards current expenditures (c.90% of expenditures have been current in nature) rather than the productive capital investments, by introducing appropriate reforms in labour market, energy market and by focusing on removing subsidies in a phased manner. The price of petrol (KD 0.06/litre) in Kuwait is cheaper than water (KD 0.10/litre) and electricity prices have remained unchanged for nearly 50 years. Electricity prices in Kuwait were last revised in 1966 and it is currently offered at less than 5% of the production cost. At the rate of KWf 2/kW against a production cost KWf 41.4/kW remains among the lowest globally. In this regard, introduction of taxes – direct (personal tax, business tax) as well as indirect (service tax, consumption tax), raising costs of government services in a gradual and phased manner could be considered. Although Kuwait maintains a high level of sovereign assets, dipping into it will only result in a short term fix and implementing a long term solution such as introduction of taxes seem more prudent. According to Marmore’s Kuwait economic themes report, business taxation and subsidy rationalization should not be seen as mutually exclusive actions to ease the fiscal situation. If business taxation is being seen as a route towards furnishing the revenue side of the budgetary equation, then it would make for poor policy to divest it of any linkages with subsidies reform. It is, indeed, the case that subsidies’ reform can prove to be sensitive among several stakeholders; however, increasing the tax burden on the private sector in lieu of gains from subsidies reform can harm the long term prospects in terms of economic diversification. The measures, if done in tandem, could help avoid subsidy leakages, ensure continued infrastructural spending and help improve competitiveness of Kuwait economy. Job creation for nationals and the need to increase the role of private sector in the economy, is also widely stressed.

Reform Matrix

Kuwait, with a low fiscal breakeven oil price of USD 51.8/barrel in 2016, is expected to weather the environment of lower oil prices better than its GCC peers. This is also, in part, due to the presence of ample fiscal reserves and buffers which stands at 323% of GDP. Kuwait, with low debt and higher fiscal reserves, accumulated during periods of elevated oil prices, could resort to raising debt in the domestic market, international market or draw down on its buffers or a mixture of both. The actions of the government, in this regard, in the coming months will be keenly watched as it would have wider implications on the economy.

Tags:  Economy, Kuwait, Outlook

Ratings:
 Current rating: 0 (3 ratings)

All-Time Highs - Kuwait 15 Index Stocks

Date : 24/01/2016
Author:  Marmore MENA



2015 is over and before we start the hustle and bustle of the New Year we would like to take a moment and reflect on the past year. The Kuwait 15 index posted a negative 15% return due to many factors including the decline in oil prices (Brent lost 35% in 2015), low liquidity and lackluster earnings growth.

Instead of analyzing the index we are going to analyze performance on a stock level and measure the divergence from the recorded all-time highs (ATH) of the respective stocks since fundamentally sound stocks (good top and bottom line growth, sound management etc.) consistently establish new ATH’s reflecting growth and opportunities. While stagnant companies may struggle to re-conquer their ATH’s and can thus test investor patience (Japan for e.g.).

Looking at Kuwait 15 Index constituents, the only positive news comes from the newly added stocks Mezzan (listed in 2015) and VIVA (listed in 2014). For VIVA the difference between the all-time high and 2015 closing price was -10% and the last ATH occurred 18 days before the year ended in 2015 while Mezzan holding lost only 2% from its ATH which occurred 9 days before the year ended. Although the two stocks feature in our note on account of being a part of the Kuwait 15 Index, we will exclude them from analysis due to its recent listings.



Looking at the list above only one company (Kuwait Food) achieved its ATH in the last 2 years and only 2 companies posted their all-time  3 years back (Mabanee and Boubyan bank). Looking at Mabanee we can see that the stock is hovering 8% below its all-time high, while Boubyan Bank is trading 24% below its all-time high. Apart from the 3 companies mentioned above, 8 companies in the Kuwait 15 index posted their all-time highs between 7 and 9 years ago and they are trading in a range of -86% to -44% of their all-time high prices.

Looking at the table above we could clearly see the impact of market mania during the bull market of 2004-2008, 10 out of 15 companies in the index reached their all-time high during this period. During market bubbles investors usually believe that stocks can only go up, thus we see stocks reaching all-time highs without being backed by strong fundamentals. That said the companies on the list are among the largest in the Kuwait stock exchange and are operational in nature compared to small capitalized companies and an uptick in the economic environment will most likely enhance growth.

The top loser in terms of number of years in our study is Agility; the company posted its all-time high in 2005, almost 11 years ago, and is currently trading 82% below its all-time high and needs to gain 448% just to catch up with its ATH. The top loser in terms of gap between the ATH and current prices is Zain. At the end of 2015, Zain traded 86% below its all-time high of KWD2.538 which means that for it to close the gap, the price of Zain’s stock must increase by 625%!

It is important for bellwether stocks to touch new highs and not languish on old glory. Stocks touch new highs primarily on performance though speculation cannot be ruled out. While speculation can set the fire, the continuance depends on fundamental performance. Being part of Kuwait 15, these stocks enjoy high liquidity and patronage from institutional investors as well. They are well covered by analysts (relative to the whole market). While constructing a portfolio/investment strategy, it is important to note whether stocks are touching new highs. It is better to avoid stocks that came away a long mile from their historic highs and shows no signs of getting there. While these stocks will still be part of index funds or ETF’s, they need not be part of an active portfolio strategy.

Tags:  Capital Markets, Kuwait, Stock Market

Ratings:
 Current rating: 0 (3 ratings)

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