Kuwait's Risk Associated with Investing in the Country - Research Paper Example

Kuwait’s Risk Analysis Kuwait is a sovereign country located in Asia. It is the eleventh richest country in the world. It is a sovereign state that has seen unprecedented economic and GDP growth propelled by the oil industry. The geographical, economic landscape and political stability have opened new opportunities for both business and cultural exchange. Country’s risk assessment that include financial, political risks and the general background information are vital in the analyzing the current environment within which a business can operate (Steven 137). Without deviating from this context, this paper will seek to analyze country’s risks associated with investing in Kuwait with direct and indirect foreign investments. Guidelines to be followed for successful Multi-National Corporation (MNC) operation in this country will also be discussed. Location and Climate Kuwait is an Arabic state located in the northeast corner of the Arabic Peninsula in western Asia and north-western shore of Persian Gulf. It is bordered by Iraq to the north and Saudi Arabia to the South. Kuwait is among the smallest countries in the world in terms of the square area it covered. It covers an estimated are of 17, 820 square kilometers. Geographically, it lies between longitudes 46 and 49 E and latitudes 28 and 31 N. The country is low lying with a highest point of 306m above the sea level. Kuwait experiences warm spring seasons in March with occasional thunderstorms. The country also experiences frequent cold winds from the northwest during winter and hot ones during the summer. Hot and damp Southeasterly winds spring up in between July and October. While the hot and dry ones prevail in early summer and spring. Natural resources and Environment Kuwait is endowed with a wide range of natural resource. They include; natural gas and great amount of oil, coal timber and minerals. Out of all the above resources; oil leads in the list. Kuwait has some of the known world’s richest oil reserves; with Burgan reserve having a total capacity approximated at 71billion barrels. Since the fall of Soviet Union, the efficiency of exploring the natural resources increased leading to an unprecedented economic growth in the country. Having the world’s fifth largest oil fields, Kuwait has put all the efforts in exploiting the oil for both domestic and exportation use. Petroleum products currently account for over 90% of exports revenues and 82% of the government income. Resource exploration has caused a serious concern for the environment. Air and water are the most affected due to the mainstream industrial centers extracting oil and gas. This pollution causes a reduction in soil fertility mainly due to the oil leaks. Therefore, loss of forest still remains the prime concern associated with the exploitation of the natural resources in the country. Political risks analysis Political risks are the risks that a sovereign state government will unexpectedly deviate the rules and policies of the game under which the businesses operate. This tests the willing ability of the state to honor its obligations. Political risk can simply be defined as the unexpected change in the regulatory, political and legal environment. It is a risk related to the instability in governance or policies. Policy instability is more pronounced in times of functional change in the state’s government. On the other hand, policy instability is most pronounced whenever power resides in a sole party. Government is part of the political risks. Governance plays a crucial part in determining the business atmosphere in a country. Kuwait attained full independence in 1961 following a notes exchange between the then Emir of Kuwait and the United Kingdom. The Gulf rupee was replaced by the Kuwait dinar. A large influx of foreign investment in the country was triggered by discovering of the large deposits of oil in the country, especially the Burgan reserve. Massive oil industry transformed the country from a poor farming community into a world class richest country in the world. The country became the leading and largest oil exporter in the Persian Gulf region. This growth attracted a large number of foreign workers from India and Egypt. The annual economic growth then was almost 16%. After the collapse of the Soviet Union, there was a transition of power. The leader who took over, come with different policies. The Kuwait Oil Company was nationalized ending the partnership with the British Petroleum Gulf. In 1982, the country experienced a serious economic crisis when the Souk Al-Manakh stock crushed and the prices of the oil decreased. 1n 1983, Shiite Dawa Party carried a series of bomb explosion on Kuwait soil as a way of retaliating the Kuwait’s financial assistance to Iraq during its war with Iran. All of the above are consequences of the change in government policies as due to different leadership regimes. International and integration relation is another political risk in any given country (Giovanni 7). After attaining the full independence, Kuwait started to create close and integrated relations with the international community. In 14th may 1963, Kuwait, as an independent state, became the 111th member state of United Nations. Kuwait also joined the Arab League and the Gulf Cooperation council. Gulf cooperation Council member states enjoyed free trade. These international relationships resulted in a vast foreign investment estimated at US$107.4 billion in 2003. The Kuwait government has ever strived not only to achieve an economic change, but also to positively transform the social welfare of the middle class. The country government has set out policies that facilitate free market exchange with many Arabic and European countries. In the process, this has opened leading markets to many countries around the world. Another political risk concerns the wages and the unemployment rates in a country. Between the year; 1998 and 2004, real wages and disposable income for the middle-working class rose by over 15% due to the economic growth. The average monthly wage was around US$600 in 2006, with a growth of 38% from 2005. In addition, disposable income went up by 5.6%. The rate of unemployment went down since the collapsing of the Soviet Union. The petroleum industry created enough jobs for most of the people in the country. However, due to the fast-growing population, the unemployment rate has started to rise in the year 2008. This has posed as a serious concern for the government. Through the policies put up to curb the unemployment problem, the country recorded a rate 6.4% in the year 2009 and 7.6% in the year 2010. Notably, cause for concerns remains that the rate of unemployment could go further up beyond 10% by 2016. Multinational Cooperation must, therefore, take proactive measures and in protecting their intellectual property rights in state of Kuwait. These measures could include registering trademarks, patent and copyrights with the Federal Service for Intellectual Property. Moreover, it is vital for business to know the labor laws in the country. Financial risks Financial risk refers to the unexpected events in a given country’s financial systems. The financial risk determinants include quantitative macroeconomics determinants and qualitative factors. Qualitative mainly include interest rates risk, currency risk, balance of trade, inflation risk and current account balance. On the other hand, the qualitative risks include payment delays, restructuring, loan defaults and loss of exchange controls (Tudor 245). Kuwait’s currency risk and inflation risk are inseparable. The Kuwait dinar continued to get stronger against the US$. From a recent study, the dinar has been on the rose for the last six months. This is because the increased oil exportation as a result of the increasing world demands. Tie to currency risk is inflation since inflation affects the value of the currency significantly. In Kuwait, the inflation rate is at 2.7 percent. Inflation affects buying power of the people. If inflation is high, the buying power is low and may result to decline of assets value. From the study conducted and published in the Times News Releases, there is no cause for alarm yet in Kuwait. Further link to currency is the interest rate risk. Kuwait has a high interest rates compared to the neighboring countries. The current interest rate is at 5.6%. High interest detrimental to any growth needed to help Kuwait but at the same time, they are vital in keeping the inflation under control (Paul 123). Trade balance is used in measuring evaluating whether a country is a net exporter or importer of goods. For the last two years, Kuwait has had a positive balance trade, indicating that it is a net exporter not importer. Kuwait exports are mainly the petroleum products which have an exceptional value in the market. Current account is defined as the broader measure of import-import activities that include royalties, employee compensation, payments for patents and gifts and grants. These accounts give a bigger picture of the foreign trade. For a compressive financial analysis, qualitative must also be taken into account. Qualitative factors discussed in this paper include the foreign controls, protectionism and exploration. Exploration occurs when a state seizes your assets without an act of compensation (Greg 312). The consequences of the exploration are severe. The exploration risk can be handled in a capital budgeting analysis. This risk affects the future of the cash flow and not the investors’ returns. Kuwait does not experience this risk. The government has always laid out appropriate policies that protect its people. Protectionism is when a government imposes rules to protect some segments of the domestic economy from unfair foreign competition. The regulations are moistly meant to protect the domestic companies (Takatoshi 126). Kuwait has exercised this risk as a way of creating job opportunities for its citizens. Most of the leading local industries have government protection through quotas, reduced tariffs and regulations that decimate foreign businesses. Conclusion After political risk analysis, it can be said that the political environment for business in Kuwait is conducive for business set up. The country lacks frequent tensions. The political stability experienced in the country provides a welcoming foreign business atmosphere. This environment will ensure that the business activities are not disrupted from time to time. The few risks that could pose threats to the investors could be resolved by registering the copyrights, trademarks and patents. This would allow the MNCs use their competitive prowess in the market. The five qualitative factors clearly indicated that Kuwait has a stable financial environment for investment. However, there are some factors that pose a threat to the financial environment. Protectionism is the biggest hurdle for a foreign business in Kuwait. According to Steven (262), MNC can solve this problem by negotiating for better business environment with Kuwait’s government before investing. The government and the MNC can go into an investment agreement that would create a win-win scenario. Works Cited "The Richest People." The World's Largest Economies 2011. N.p., 20 Feb 2011. Web. 19 Nov 2011. . Giovanni, Piersanti. The Macroeconomic Theory of Exchange. London: Oxford University Press. 2012. Print. Paul, Rodgers. Financial Analysis. Oxford: Butterworth-Heinemann. 2007. Print. Steven, Bragg. Financial Analysis. New Jersey: John Wiley & Sons. 2012. Print. Tudor, Spencer. Financial Analysis. Hertfordshire: Select Knowledge Limited. 2009. Print. Fawzi, Al-Sultan. Risks Analysis. Washington: World Bank Publications. 2004. Print. Theodore, Moran. International Political Risk Management. Washington: World Bank Publications. 2004. Print. Juan, Tata. Kuwait: 2009 Article IV Consultation. New York: International Monetary Fund. 2009. Print. Al-Sabah, Shee. Oil Economy Of Kuwait. New York: Routledge. 2009. Print. Olivier, Blanchard. Rate of Unemployment in Kuwait. Cambridge: Cambridge University Press. 1998. Print. Christian, Gollier. The Economics of Risk and Time. Massuchetts: MIT Press. 2004. Print. Takatoshi, Ito. Trade and Protectionism. Chicago: University of Chicago Press. 2005. Print. Greg, Reid. Exploration. New York: Black Rabbit Books. 2008. Print. Read More