Kuwait's Political Hostilities Test Investor Confidence

After Dubai's debt debacle, will Kuwait become the next Persian Gulf state to come under greater international scrutiny?

The wealthy state, owner of 10% of the world's oil, isn't about to run out of money. But a political crisis, exemplified by Parliament's demand this week that the state bail out its indebted citizens by buying $23 billion of consumer loans, is driving away foreign investment, damaging the country's economic prospects.

Kuwait is the only Arab Gulf state with a fully elected Legislature. But the fractious relationship between Kuwait's ruling Al Sabah family and the Islamist-dominated Parliament risks creating economic stagnation. In the past three years, Kuwait has seen the dissolution of three parliaments and the resignation of five governments. The emir, Sheik Sabah Al Ahmad Al Sabah, is expected to oppose Parliament's consumer-loan bailout bill, leading to a new bout of hostilities between the two camps.

The dispute will do little to raise Kuwait's profile for investors. The sheikdom already receives less foreign direct investment than any other Gulf Cooperation Council state, ranking alongside Yemen and Iraq, according to the U.N. Foreign investors are losing confidence despite the emirate's energy riches. Last year, Kuwait canceled contracts valued at more than $8 billion to build a new refinery in the Gulf state due to political objections. Oil companies, including BP, Royal Dutch Shell and ConocoPhillips, have become weary of the promise that Kuwait may open up its border oil fields with Iraq for investment. BP, which has operated in Kuwait for more than 50 years, has scaled back its office.

But without more foreign investment and expertise Kuwait is unlikely to achieve its target of boosting oil-production capacity to four million barrels a day, from below three million barrels now. Kuwait's economy was the worst performer among the six-member Gulf Cooperation Council in 2009, according to the International Monetary Fund. Shares on the Kuwait Stock Exchange slumped 10% last year, compared with double-digit-percentage gains for Abu Dhabi, Saudi Arabia and even Dubai.

Without radical overhauls, Kuwait's economy will continue to lag behind others and oil production will suffer, threatening the country's role as one of the top producers of the Organization of Petroleum Exporting Countries. For investors, Kuwait is a further reminder of the political risks that lurk among even the most oil-rich states as their institutions struggle to keep up with the pace of social and economic change.END