Kuwait must reinvent its energy model and capital markets

Markets turned bullish after the Emir dissolved parliament in May 2024, breaking years of political gridlock

Alamy via Reuters/Matyas Rehak | Kuwait provides generous subsidies and a majority of employment is in the public sector

It is no accident that Kuwait’s first sovereign Eurobond since 2017 drew $28 billion in bids. Its narrow spreads underscored the country’s standing as one of the strongest credits in emerging markets – rated A1 by Moody’s, on a par with Japan and China.

The buy-side’s aggressive appetite for Kuwaiti sovereign debt stems from multiple factors.

First, the issuer carries significant scarcity value in the Mena bond and sukuk market.

A years-long political deadlock between the government and parliament delayed passage of a public debt law until March, leaving it with just one outstanding Eurobond – a 2027 maturity – trading in the secondary market.

As a result, banks and insurers from the GCC, Switzerland, the UK, southeast Asia and Japan crowded into the deal, chasing a rare sovereign credit with a debt-to-GDP ratio of just 10 percent and the backing of the Kuwait Investment Authority (KIA) – a trillion-dollar sovereign wealth fund with global reach.

Markets turned bullish after the Emir dissolved parliament in May 2024. This broke years of political gridlock and gave the cabinet the authority to push through transformative economic reforms no longer subject to ossified bureaucratic opposition.

History, geology and geopolitical trauma have shaped Kuwait’s economic model since the emirate discovered its first oil gusher in the early 1950s, when it was a protectorate of the British Empire.

As a city state at the mouth of the Gulf, it was uncomfortably sandwiched between Iraq and the Shah’s Iran. This militaristic, pro-Soviet Iraqi state sought to end Kuwait’s independence in 1961, while the country also faced pressure from the far more powerful Saudi kingdom.

Geopolitical insecurity triggered constant capital flight, forcing the Emir to locate the Gulf’s first sovereign wealth fund in the heart of the City of London. The KIA was fortunately safely based in Bishopsgate when Iraqi forces under Saddam Hussein invaded and overran Kuwait City in August 1990.

As the original Gulf petro-emirate, Kuwait remains fabulously wealthy. It has access to 105 billion barrels of proven oil reserves, an Opec+ production quota of 2.5 million barrels per day, and a small population of just 1.57 million citizens – who remain eligible for some of the most lavish welfare benefits in the world.

It is sad that Kuwait’s lavish resource endowment has failed to prevent chronic power failures and sporadic blackouts

The past decade has been surreal for Kuwait. Legislative gridlock triggered a daisy chain of elections, six prime ministers, no fewer than 15 oil ministers and a deep freeze on development projects. Since parliament prevented Kuwait from borrowing in the Euromarkets, the KIA had to plug budget deficits from its Fund for Future Generations.

Kuwait’s economic lost decade is symbolised by a failure to upgrade an obsolete power grid, despite being a founder member of Opec since 1960 and boasting the highest proven oil reserves per capita of any other GCC or Mena oil and gas exporter.

It is sad that Kuwait’s lavish resource endowment has failed to prevent chronic power failures and sporadic blackouts. Subsidies of $3,500 per capita mean that consumer electricity bills cover only 5 percent of the power grid’s operating costs.

Consequently, a GCC state with 105 billion barrels in oil reserves has been forced to become one of the largest LNG importers in the Gulf, primarily from Qatar and Abu Dhabi.

Kuwait must modernise its power grid if it is to develop its industrial base and boost its non-oil exports. With a budget breakeven price of $90 Brent and a fiscal deficit of nearly 8 percent of GDP, the Kuwaiti economy is paying a steep price for decades of underinvestment in energy infrastructure.

The state also needs to update its social contract with its citizens, 80 percent of whom are on the public payroll. Public sector wages are about 40 percent higher than those in the private sector.

Approximately 60 percent of electricity demand is generated by the conspicuous and wasteful use of air conditioning. Fiscal discipline is obviously limited in a state that spends 80 percent of its budget on generous wages and subsidies.

Dubai’s smart government initiatives may yet serve as a model for Kuwait as it seeks to reduce a bloated public sector wage bill. Economic diversification of the kind pursued in the UAE and Saudi Arabia is essential if the country is to get back on track.

Above all, the state must rethink and reinvent its governance model to push on with economic reforms and enhance competitiveness in an era of trade conflicts, geopolitical rivalries and low oil prices.

Kuwait can use the KIA as Abu Dhabi does with ADIA and Mubadala, and Saudi Arabia does with the Public Investment Fund, to develop local capital markets.

The country once boasted a thriving Kuwaiti dinar-denominated Eurobond market before the Iraqi invasion and banking traumas of the 1990s strangled this innovative capital markets niche.

The reforms introduced so far could yet produce a recalibrated financial renaissance in Kuwait Inc. To that end, the country’s highly anticipated debt and mortgage law should be the first of many steps toward emulating the UAE’s innovative, globalised property market.

Kuwait is ideally positioned to become a property market magnet for Iraqi, Turkish and Levantine investors.

Matein Khalid is an investor in global financial markets and board adviser to leading family offices in the UAE and Saudi Arabia

By Matein Khalid

October 16, 2025, 12:14 PM