Sustainability in Kuwait’s economy

Kuwait

Manaf Abdulaziz Alhajeri, CEO of Kuwait Financial Centre “Markaz,” talks to TOGY about Kuwait’s approach to diversification, lessons from the partial privatisation of the Boursa Kuwait and how the country can boost its status in global indices. Markaz specialises in fee management and investment banking, including acquisitions and market research.

This interviews is featured in The Oil & Gas Year Kuwait 2019

How is Kuwait approaching diversification away from the oil and gas industry?
Despite the exceptional fiscal position the country currently has, the sustainability of our economy continues to be a major concern. This is largely because oil continues to be a sector which is given top priority. Moreover, the hydrocarbons industry is an ambit the government has given ample room for investment to, a reality which has sparked competition, innovation and more inclusiveness. This has given way to a variety of public-private partnerships and SMEs found in this particular sector.
From here, one could say that the keyword is sustainability. All the steps that Kuwait is taking now are toward a more sustainable system, which is one of our most pressing issues. It is not poetic talk any more, but rather a short-term risk factor for our business model.

What challenges remain in eradicating systemic loopholes?
Results in this area have been a mixed bag. Public policy has been very articulate when it comes to deciding its aims, which include institutional excellence. This relates especially to the public sector, where matters such as governance and transparency are objectives that ought to be tackled and thus have been given priority. These are noble goals but their implementation remains a challenge.
What is more, we have not been successful in introducing the VAT tax nor in deregulating fuel prices or power prices. This requires a broader dialogue between all stakeholders and the government, and it should not be strictly in the realm of the World Bank or the IMF.
Different partakers within Kuwait’s public space should engage in a constructive dialogue to prioritise quality deliverables of development. Elements such as quality healthcare and education should be covered. Moreover, efficient public administration procedures should be also introduced in order to avoid painful reforms such as tariffs and tax increases.

What impact and lessons has the partial privatisation of the Boursa Kuwait and its strong performance had for the market?
It has introduced clarity to the market debate about the principle of inclusiveness. It is important to understand that the sustainability of market performance has to do with the inclusion of all stakeholders and quoted companies in the stock market.
Unfortunately, most liquidity and interest goes to a concentrated group of publicly quoted companies, mainly in the banking sector. Around 80% of the liquidity is going through 19 companies out of 200 or more. This means that only 10% are enjoying the gains. Additionally, many of the companies that deserve to be seen by public investors are not getting this opportunity.
Therefore, the target now is to achieve a stock market that is more inclusive and hence more sustainable, a market that involves the domestic mutual funds industry and more publicly quoted companies.

How have recent regional events affected the ease of investing in Kuwait?
The economic balance in the GCC region is mainly dominated by two variables: oil prices and geopolitical stability. Accordingly, the ease of doing business continues to be our major priority and for this reason, a number of reforms are being implemented.
There is a clear need for a well-crafted National Investment Policy which can recycle the surpluses of our economy and improve the overall competitiveness of the market. In addition, efforts are seen through KDIPA [Kuwait Direct Investment Promotion Authority], which is pushing Kuwait to escalate in the MSCI Emerging Market Index. Consequently, the country’s recent upgrade from a frontier to an emerging market is, more than anything, based on a change in mindset and the efficiency of our public spending.
However, this scenario seems to clash with the “high-risk” regional depiction that international consultants claim Kuwait is a part of. This is triggering instability and a consequent flight of capital in a time where a broad consensus has been reached to encourage domestic investing to [move towards] inward investment.

What degree of success is the private sector enjoying?
The Kuwaiti private sector enjoys a status of maturity, robustness and high transparency. We have world-class private organisations, especially in the financial sector – in banking or investment – as well as in the telecom and logistics sector. In addition, SMEs – notably in the food and beverage sectors – have reflected an exceptional performance thanks to which many global VC funds have an eye on the growing opportunities coming from this ambit.
Overall, investment companies enjoy the strongest regulation by the Central Bank of Kuwait and the Capital Markets Authority in accordance with best international practices. The nonbanking sector has also been a source of innovation despite strong regulations. Its openness to embrace financial technology, innovation and instruments has been crucial. It is here where Markaz has pioneered many options in the GCC such as REITS, sukuk and BOT-backed securities.
Also, the government sector has shown considerable traction in inviting capital flows through Kuwait Boursa and KDIPA, which in turn will lift up our competitiveness.

What approach does Markaz take to implementing Fintech and automation?
Fintech is not an objective in itself, although everyone talks about it as if it were. We have to relate it to the meaning of our industry and what we are aiming for. In this sense, Markaz is a key player in the intermediation between depositors/investors on the one hand, and entrepreneurs and their opportunities on the other. It is our mission to reach to more and new segments for the financial services to be more inclusive.
Since the global financial crisis, banks have reduced their lending to SMEs, providing many online platforms to act as intermediaries which offer capital services to the customers. For example, the new model of ‘peer-to-peer lending’ matches lenders with credit-worthy borrowers, using information beyond the credit scores used by banks (i.e., social data). Thus, fintech has enabled SMEs and other non-conventional borrowers to secure funding straight from lenders.

Is Markaz betting on human-based robo-advice solutions?
This high-surplus region also has its intricacies. Doubts arise among investors when it comes to accessing opportunities and the kinds of risk related to these opportunities. It all boils down to questions on asset allocation schemes. It is here where we give them a plan as to where to put their money regarding regions and asset classes – real estate, bonds, equity.
Although we see that many players are doing this in a fully automated way, Markaz believes that human trust – one of our main strengths – is key to any fintech solution. Furthermore, human-professional advice is crucial, and we are not going to fully automate it in our zeal to come up with an automated solution.
We are working with partners in Asia on an integrated concept, a novel human-based robo-advice solution. This is an area that we are spending a lot of time and money to develop and we expect it to come with a product which will hit the market by the end of this year.

Do the 2040 goals to ramp up oil production represent an opportunity for Markaz?
It is both an opportunity and a challenge. Unfortunately, the principle of inclusiveness is not fully achieved when it comes to the oil and gas sector. There is a strong bias toward a small number of international names. There are huge opportunities in the hydrocarbons sector; however, one must not look at it as if it were the only hope for the region but rather as an anchor to develop other sectors.
Furthermore, we will continue to aim for outstanding returns by selectively investing in exploration and production, midstream, downstream and petrochemicals across both Kuwait and the Gulf region energy value chain. This investment includes supporting service companies that require capital for growth, joint ventures with international and local firms operating in the Gulf region, equity shares of entities that are operationally sound but require financial support, and consortia executing greenfield and/or brownfield projects.

What plans does Markaz envision?
We want to continue to grow as an institutional investor that has a strong track record of rates of return. We have demonstrated a strong performance within the GCC and MENA region through global equities, investment banking and particularly real estate, where we have a presence in the USA, Germany, Poland and Turkey, among other countries.
Our record of accomplishments showcases a firm stand within the oil and gas sector. In this regard, we believe that there will be an array of energy-related projects to be executed over the next decade that will generate high growth in the region. These major projects will develop additional capacity and upgrade existing infrastructure and facilities across the energy value chain. The execution of such projects will require the participation of well-capitalised local service companies, many of which Markaz intends to help develop and grow.
Lastly, we are enjoying an enviable position as recognised by many market awards, and more importantly by the trust of our institutional investors. To continue on this path, priority will be given to the upgrading of institutional excellence and innovation, which, in the eyes of Markaz, are key levers which will add further value to Kuwait’s market.

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