Effect of Political Issues on the Finance and Common Stock in Kuwait - Research Paper Example

Sur Effect of Political Issues on the Finance and Common Stock in Kuwait Introduction: Kuwait was earlier considered as a gateway of the Arab World owing to its strategic location by the side of the Arabian Gulf. Being a port, the place has been greeting several individuals from different cultures and backgrounds. It has become one of the most popular countries after the discovery of oil thereby leading to greater developments of the country that once was involved only in fishing, pearl diving and trading. Now the country is capable of securing its infrastructures and facilities and its excellence in the use of technological advancements. The history, heritage and growing development of the country have allowed Kuwait to become unique in its own way. Along with modernizations being incorporated, the country also maintains its standard traditions and cultures as well (About Kuwait). As far as the economic and financial condition of the country is concerned, Kuwait in the recent years reflected improved results in the macroeconomic issues related to the country. However, there are challenges still existing for the company needing greater developments in the social and physical infrastructure of the country. This development is required for the diversification of the economic foundation of the country. Thus although the country reflected satisfactory results as far as the fiscal and external surpluses of the country are concerned, yet the concerns are in relation to the quality of the infrastructure, health and education that also considers the gross domestic product of Kuwait (Kuwait and the IMF). However, it can be realized in this regard that several factors may be responsible for the finance and common stock in Kuwait. The present study focuses on learning about the political factors that may have effects on the finance and common stock in the country. The Political Situation Prevailing in Kuwait: In the recent years the political situation in the country of Kuwait has been part of several disputes and struggles that existed between the Parliament of the country and the Council of Ministers. This council reflects the executive branch of the government of the country. There have been recurring political deadlocks in the last two years leading to the resignations of ministers of the council. This was also followed by the reappointment of the post of Prime Minister in the country. In the present times, the situations have become violent where protestors have been found to break into the parliament and force the Royal Family to suspend the existing legislature allowing space for immediate elections. This has led to the opposition party taking the power of the majority of the parliament and a Prime Minister has been selected from a different background of the Royal Family from that what has been traditional. Disagreements and disputes between the parliament and the Prime Minister had arisen from the time when the government was being formed. There were differences in their choices where the Prime Minister wanted to involve parliamentary members in the deliberations and meetings, and the majority of the parliament had objections to it (Omar). The degree to which members of the parliament and other political performers in Kuwait opposed to each other and struggled in Parliament stay put restricted to the limits of the Royal Family, keeping hold of its patrimonial position in the social order. Political disagreements are, consequently, restricted to arguments between Parliament and ministers, the compelling of the Council of Ministers at the powers of the government, and, from time to time, the obligatory resignation of ministers or all the Ministers of the Council. On the other hand, modalities of antagonism in Parliament in the present times are gradually more professed as a righteous opposition to the preferences of the political management as Parliament has turned out to be ever more decisive of the Prime Minister as well and not only for the members of his Cabinet. This situation has enforced the leadership of the country to put back the Prime Minister “himself with another as opposed to the political leaderships' traditional reshuffling of ministers and replacement of unpopular ministers and Cabinets” (Omar). Contemporary Kuwait materialized as a self-governing, autonomous state under the powers of its originator, Mubarak al-Kabir al-Sabah whose time in power and dominion would be hereditary by his sons as predetermined by the Kuwaiti establishment. His successors survive on as the “Royal Family's four patronymic groups or families” (Omar). As a consequence of the control and managerial expertise owned by members of the al-Jaber and al-Salem divisions of the Royal Family, nonetheless, management of the Emirate has been restricted to the two meticulous families, considering an implicit accord that stated that they exchange the arrangements of Emir and Crown Prince. However, current advancements demanded that affiliates of the al-Jaber branch of the Royal Family engage the positions of Emir and Crown Prince at the same time, in addition to the Prime Minister. Irrespective of the realistic and strategic motives following the “monopolization of these positions by the al-Jabers, however, discontent seems to have been growing amongst a segment of the al-Salem family, as well as some in the other two branches of the Royal Family who have traditionally been excluded from government for decades” (Omar). Lack of International Influence: Kuwait has a poor international influence with democracy promoters such as European Union and United States despite the fact that the world has become a global village. International influence on the global market has, therefore, not affected Kuwait like other countries in the world. This is because the country has withdrawn its investment from United States and European Union causing catastrophic consequences. Oil and hydrocarbons from Kuwait cannot venture into European and American market thus lowering their profit margin (Thuroczy 2010). On the other hand, EU and US have interfered with Kuwait’s politics due to their need for the hydrocarbons from this country. One example is their link with 11 September terrorist attack in United States. This indicates that political inability to relate with other countries around the world has affected its economy due to lack of oil sale in the global market. In addition, poor international influence has also caused conflict with European countries (Thuroczy 2010). Over the last twenty years, Even if Kuwait has developed its oil-production capability to 2.5 million barrels per day, it still sticks to the 2 million barrels per day ration set in November 1993 by OPEC. To formulate up for the decline in oil prices and OPEC production ceiling, Kuwait seeks to boost the value it affix to each barrel by escalating its refinement capability and intensifying its presence in downstream companies such as Q8 gas stations in Europe (Thuroczy 2010). Given the likely prospect increases in world demand, Kuwait's oil revenues are likely to stay around their existing levels or increase. However, the government does not suffice to wrap rising public expenditures. In addition, lack of international influence in Kuwait has affected the country’s income from financial reserves. Currently, Kuwait's foreign assets have plunged from their pre-invasion point, anticipated at $113 billion, to a mare $46.7 billion (Thuroczy 2010). Largely this is due to the operating cost related to freedom and rebuilding of the country. In addition, $5 billion has been lost because of corruption, mismanagement, and misappropriation, particularly in government offices. Despite this steep decline, the ongoing budget debit means that these resources are being drawn down extra to economics the public debt. Since 1993, the departure has been estimated to be $7 billion a year. At the current level of bankruptcy, the assets will be gone in about ten years. On the other hand, stemming these departures would mean that foreign reserves bring at 5 to 6.5 percent and a yearly return of around $2 billion (Thuroczy 2010). Effect of Political Factors on the Finance and Common Stock in Kuwait: In the recent years particularly in the year 2011, there have been several incidents affecting the worldwide finance and economic conditions. This includes incidents like the earthquake in Japan and the debt crisis in Europe as well. The economy of Kuwait is largely dependent on its oil capacities accounting for almost half of the GDP as well majority of its income generations. The country has a hold of around 7 percent in terms of oil reserves in the world. Increases in the price of oil have kept rising the national budget revenue in a progressive manner, and it is expected that this growth would stay secure in the medium-term. In the year 2010, the present government of the country considered major steps in the financial expansion, in the course of “passing of a privatization bill for sale of key government utilities and assets to the private sector and an economic development plan” (Abotalaf and Palejwala). The Kuwait government in recent times passed a considerable measurement of the preparation appreciated at KWD 29.6 bn (USD 107.0 bn) to make available incentive to diverse segments of the financial system. “The bearish financial markets with low trading volumes and declining market capitalizations, challenges the national economy and calls for stern measures for the country’s long term economic steering” (Abotalaf and Palejwala). In the recent years the financial condition of Kuwait has been knocked out as against other gulf countries reflecting a slower rate of growth regardless of its sturdy monetary balances. It was obvious that the country required a developmental plan as the most important revenue basis is oil and there was need for diversification. In 2010, the parliament of the country permitted a new development plan, and in the lead of execution of the plan, the economy of Kuwait was expected to display an affirmative growth along with supports from different infrastructure projects. The government had promised to help transform Kuwait into a chief financial center and trade center by the year 2035 with this developmental plan being accomplished. The original plan was anticipated to be finished by 2013/2014 with a projected total cost of KWD 37.0 bn (USD 129.0 bn). In spite of that, the completion of the plan is “being held back by political disputes between the government and the general assembly members” (Abotalaf and Palejwala). Uninterrupted political disputes led to slow down the implementation of the plan, even in the face of the lately elected government in 2011. Several projects, like the Kuwait Health Assurance Project (KHAC), were believed to commence this year however were delayed. The projected projects, “if implemented, will push the economy to a new level. A huge emphasis on investments is essential for Kuwait to become a financial hub in the region” (Abotalaf and Palejwala). The condition of the country can be illustrated from the following graph that represents the Gross Domestic Product rate of growth of Kuwait in the recent years: Figure 1: GDP Growth Rate of Kuwait (Kuwait). From the above figure it can be observed that the GDP growth rate of the country was 10.6 percent in the year 2007. It increased in the year 2008 to 22.7 percent. However in the year 2009, the rate again declined to -21.2 percent reflecting a huge decline in the growth rate of the country. Stock Market in Kuwait: The market capitalization of Kuwait Stock Exchange (KSE) “as of FY2010 stood at KWD 36.3 bn (USD 130.6 bn), and it lists 215 companies spanning across 10 sectors” (Abotalaf and Palejwala). The starting of 2011 reflected release of the financials of the different companies. Although the corporate revenues were recorded banks and other financial institutions, the sentiments of the investors could not be motivated. The weighted index of the KSE was significantly affected by the political and regional disorder prevailing in the MENA region. It resulted in the maximum decline of 1.9 percent at the end of January. The general decline of the month was at 0.7 percent that led Kuwait to become the least performing country in the GCC markets. The real estate sector encountered similar decline in its growth rate in market capitalization reflecting around almost 5.0 percent reaching KWD 1.9 bn. The reason behind these declines was the heavy ventures of the real estate firms in different Egyptian real estate projects. Services sector pursued the same drift and thus declined in market capitalization by almost 4.0 percent. Correspondingly, Agility’s legal cases of the country with the Government of the United States led to the fall of the stock price by almost 12.0 percent to KWD 0.460. “Nevertheless, trading value recorded an increase by 20.0% from the previous month to close at KWD 844.8 mn being traded in January” (Abotalaf and Palejwala). The official exchange rate of Kuwait against the US can be illustrated through the following graph: Figure 2: Official Exchange Rate (Kuwait). With the increasing political tensions across the regions, the financial crises affected the financial institutions significantly such that recovery was becoming highly difficult. “KSE weighted index slumped to 441.6, a further 3.7% drop on the 20th of February, which brought it to its lowest since early September 2010” (Abotalaf and Palejwala). The overall market capitalization of KSE in the month of February in 2011 reflected declines from the month of January by around 5.7 percent. With Libya participating in the political turmoil, the blue chip companies in Kuwait encountered a general decline in the prices of stocks reflected in the month of March, 2011. The month of April presented certain positive results with the banking sector releasing positive first quarter results. However, again in the next month the stock prices reflected declines. The month of June was further deteriorating. “The growing political tension and the CMA regulations over investment funds resulted in a negative investor sentiment” (Abotalaf and Palejwala). The forever complicated political situation in Kuwait has become more stressed in the last year. The Prime Minister who remained in position since 2005, Sheikh Nasser Al Mohammed Al Sabah, resigned in November 2011 being pressurized from the members of parliament and other young protestors who started protesting on the streets against assumed corruption. A new parliament was hence elected through the elections in February 2012 supported by significant strength from the anti-government and anti-corruption members being part of the protests and movements against the Prime Minister, chiefly from tribal and Islamist backgrounds. On 20 June nevertheless the Constitutional Court of Kuwait, declaring on several cases without delay, negated the consequence of February’s elections, asserting that the earlier parliament that was selected in 2009 has been suspended unconstitutionally. The parliament that was restored in 2009 on the other hand has been powerless to achieve quorum. “New elections are expected for the autumn; although they may be delayed by political and legal disagreements between the government and opposition parliamentarians about the nature of the electoral system. This long period of doubt in the system has begun to affect the Kuwaiti business climate, with the 2012-13 budget not yet passed, and some projects experiencing delays due to the lack of political progress” (Overseas Business Risk – Kuwait) Conclusion: From the above study, it can be realized that Kuwait has struggled a lot in order to accomplish its current position in the world in terms of its oil reserves as well as its financial and economic condition. However the political situation in the country has been severely disputed in the recent years largely affecting the business performances involved in the country as well as the financial and stock markets of Kuwait. With the significant disputes and disagreements prevailing among the Prime Minister of the country and the members of the parliament, several important projects related to infrastructure and other sectors as well, remained delayed leading to declines in the growth rates of the country, and also affecting the stock prices as against other gulf countries. However, it can be expected that the government would consider efficient measures to overcome the present state of political affairs such that the effects on the finance and common stock of the country may be balanced for improvement in the future. Summary: This particular study has been focused on the political effects on the finance and common stock in Kuwait. From the findings and analysis of the study, it can be summarized that in the recent years the political situation in Kuwait has been disturbed and disputed significantly reflected through the struggles between the Parliament of the country and the Council of Ministers. Resignations of ministers and reappointment of the Prime Minister have been parts of these disputes and struggles leading to significant effects on the financial condition of the country. Also, lack of suitable international influence has also proved to be a negative aspect for the country. Being largely dependent on oil reserves, the disputes in political affairs destroy the implementation of several important projects related to infrastructure and others in the country. With the disputes and outcomes in political issues, the growth of the country has reflected slower rates than other gulf countries. The prices of the stock in the country have also been affected as a result of such crisis. However the country is trying for new developmental plans such that the political effects may be countered and different projects may be successfully implemented in the country. References Abotalaf, Aminah and Mahir Palejwala, Kuwait Economic Report, 2011, December 14, 2012 from: http://www.capstandards.com/Kuwait%20EconomicReport.pdf “About Kuwait”, KIF, n.d., December 13, 2012 from: http://www.kif.net/index.php?option=com_content&view=article&id=66&Itemid=186&lang=en “Kuwait”, euromoneycountryrisk, 2012, December 14, 2012 from: http://www.euromoneycountryrisk.com/Wiki/Kuwait “Kuwait and the IMF”, IMF, 2012, December 13, 2012 from: http://www.imf.org/external/np/ms/2012/043012.htm Omar, Abdullah, Shedding Light on the Political Situation in Kuwait, 2012, December 13, 2012 from: http://english.dohainstitute.org/release/f88aacf2-c2e3-425f-9074-aeaf538dda6e “Overseas Business Risk – Kuwait”, UKTI, 2012, December 15, 2012 from: http://www.ukti.gov.uk/export/countries/asiapacific/middleeast/kuwait/overseasbusinessrisk.html Thuroczy, F 2010., Available from . [01 Oct. 2012] Read More