Government workers’ salaries in Kuwait are a hot topic these days. Parliament members are trying to win the confidence of their voters by increasing their salaries without any thought to the implications. The government is now awarding its employees with certain majors special salary additions. They also increase everybody else’s salary by KD 100 (to be fair).

These actions are causing a huge strain on the government budget. Salary expeditures have grown by 150% in the past 8 years (up from KD 1.7 billion in 2005 to KD 4.4 billion this year). Kuwait’s budget has been in a surplus for the past couple of years due to high oil prices, but as these expenses increase, and the outlook on oil and the global economy remain bearish, Kuwait’s budget outlook seems dim. If the global economy does go into a recession, and oil drops again to $30, then Kuwait would probably receive KD 6 billion less than the budgeted oil revenues (in the budget, oil is forecasted to be at $60), raising the deficit for the year to KD 13 billion, up from the KD 7 billion forecasted.

These salary increases are also having a negative unintended affect on the Private Sector. These increases are negating the effect of the Manpower Government Restructuring Program (the monthly support the government offers to Kuwaitis in the private sector to encourage citizens to work in the private sector).

As the markets are tanking, sending oil prices down due to fears that the US and other developed economies might face periods of slow economic growth (or a recession). Low oil prices raises a red flag in Kuwait, as concerns about the government budget start to rise.We did a simple “back of the napkin” calculation to get the price of oil that the Kuwaiti givernment budget breaks even.

We start with the expenditures. The budget forecasts an expenditure 0f KD 19.44 billion, or USD 71.45 billion. We subtract the non-oil revneus (electric bills, taxes, etc), which are forecasted to amount to KD 1.14 billion (or USD 4.18 billion), leaving us with USD 67.27 billion. We then add 10% of the needed oil revenues, as Kuwait allocates 10% of its oil revenues to the Future Generations Fund (managed by the KIA). The total oil revenue that Kuwait needs amasses to USD 74 billion. If we assume that Kuwait produces 2.5 million barrels per day, then the break even oil price would equal to $81.09, 20% below current prices.

So for the time being, the goverment budget will generate a surplus.

According to our sources, the Kuwait Investment Authority (KIA) will double the seats available for its current MBA scholarship program from 10 seats to 20 seats. I hope this serves as great news for everyone planning to pursue their MBA degree! This is a fundamental step that we applaud especially since, last year, the KIA declined to send students admitted to top MBA programs because of budget restrictions.

On another related note, a group of students admitted to the current MBA scholarship program submitted a proposal for an increase in the scholarship’s monetary benefits. These benefits have not been raised since the onset of the program in 2002. Rising inflation in the United States, from 2002 until the time 2011 admittees graduated, accounts for 32.7%, thus, current students get 32.7% less than their 2002 peers. The group is also proposing married student benefits as is implemented by all other scholarship sources.

Below is a recap of the performances of GCC stock markets for the first half of 2011:

2011 has been so far a volatile year for oil prices. Oil prices started the year at the $80 levels, when it shot up to the triple digits level post the Libyan crisis, as 1.5 million barrels a day were cut from the oil market. The past couple of months has seen oil prices on the downward trend. In May, fears of a lack of global recovery (lower US growth, Euro debt crisis) caused questions about demand for oil, leading the price of the commodity to depreciate. Then came June, where supply was the issue rather than demand.

In the oil market in June, we saw two camps rising: A camp that wanted to see oil prices decline, and another camp that wanted oil prices to remain at the triple-digits level. It is not a fight between producers of oil and consumers, as the world’s biggest exporter (Saudi Arabia) was in the former camp, wanting oil prices to decline to reasonable levels. During an early June meeting of OPEC, Saudi Arabia pushed for an innotiative that would see OPEC’s prodcution increase by more than 1 mn barrels per day. Saudi Arabia was supported by Kuwait, UAE, and Qatar, while Iran, Algeria, Venezuela, and Angola opposed the measure. After failing to increase the production targets, Saudi’s Oil Minister called the meeting one of the most disasterous OPEC meetings. The Saudi’s, claiming that high oil prices diminish demand and global growth, went ahead and increased produciton. Kuwait’s oil minister also announced that Kuwait will meet the Global demand for oil. The riveraly between Saudi Arabia and Iran can also be seen politically, where the two nations are trying to control the region, especially turing these turbulent times.

Last week, The International Energy Agency (IEA) came out and said that the are releasing 2 million barrels of oil per day for 30 days to cover the Libyan shortfall, as these high oil prices are hurting global growth. This sent oil prices down by 5%. The IEA’s move is significant as the Agency has acted twice prior to its recent move, once in 1991 during the Iraqi occupation of Kuwait, and again in 2005, during Huracaine Katrine, when the US was in-need of refined products. Though the move is temporary, as the Libyan oil is thought to stay out of services until the end of the year. The IEA’s move can also be seen as a market stimulus, especially during the end of QE2, as the increased supply of oil will lead to lower oil prices, and higher economic growth.

Oil prices went down 12% in June, and are down 20% from their peaks.

MSCI announced their decision on whether to upgrade the UAE and Qatar markets from Frontier to Emerging or not. They decided against the upgrades. The issues that the MSCI sited against the upgrade were the foreign ownership limits and the introduction of the “delivery-versus-payment” system. The UAE has a foreign-ownership limit of 49%, and has implemented the “delivery-versus-payment” system, but the MSCI has said that they needed more time and more feedback from market participants on the new system. Qatar has a 25% foreign ownership limit. The markets in the UAE have expected an upgrade, which caused the market to shed a 1% today after the announcement was made. An upgrade to Emerging from Frontier to either countries would have led to increased liquidity and interest from investors around the world. MSCI will look again in December on whether upgrading UAE and Qatar to Emerging markets is a possibility. Kuwait is a Frontier market and is not a contender to be upgraded to Emerging due to the numerous hurdles the Kuwaiti market faces.

It has been announced that there is some changes that are going to occur at the Kuwait Stock Exchange. The KSE will change the categories to which stocks belong to. The new categories (or Sectors) include: Oil and Gas, Basic Materials, Consumer Goods, Healthcare, Consumer Services, Telecom, Banks, Insurance, Real Estate, Financial Services, and Technology.  The move seems reasonable as the new categories will be more specialized rather than having a generic “Services” category. However, I think it will be difficult to fill some of these categories, such as Technology, Healthcare, and Basic Materials.

Also, a new index will be added, named “Kuwait 15″, which includes 15 of the biggest companies listed on the KSE, based on both market value and volumes. The index is to be adjusted semi-annually. I think the new index would be a better indicator of the overall market as many companies in the current benchmark are not traded frequently, distorting the returns of the benchmark.

Below is the what companies the Kuwait 15 will probably include:

National Industries and Gulf Cable are ranked 16th and 17th in terms of size, but are very close to Agility (15th).

It seems that the only positive news we hear about Kuwait is about its Retail sector. A new report is bullish about Kuwait’s retail sector, ranking Kuwait amongst the top 5 retail markets in developing nations. A T Kearney publishes an annual report that ranks the retail market in more than 30 developing nations, assessing thier Country and Business Risk, Market Attractiveness, Market Saturation, and Time Pressure. Kuwait came in fifth (highest in MENA), falling behind Brazil, Uruguay, Chile, and India. The report also measures the attractiveness of the Retai Apparel market, where Kuwait came in third after China and the UAE. Saudi Arabia came in fifth after Russia.

According to the report, Kuwait’s demographic trends have led to retail sector growth of 8 percent annually over the past five years. Overall, retail sales are expected to grow from $8.41 billion in 2011 to $11.92 billion in 2015. Kuwait has one of the highest retail sales per capita of any country in the Index ($4,300) due to Kuwaitis’ high disposable income helped by the welfare state. The key downside to Kuwait is the relatively small market, meaning entry will most likely make sense as part of a regional approach. Saudi Arabia’s market is highly ranked due to its big population and rising income. However, government regulations could hinder entery into the market. The UAE is highly saturated and finding good opportunities in the retial sector is difficult, according to the report.

The stocks of both companies moved in ways that mirrored their companies’ performances. While Wataniya has shed 63% of its value from late April (the day the stock was reinstated after the company’s announcement of ceasing operation) to date. On the other hand, Jazeera has gained 78% dueing the same period.