Kuwait’s heavy debt looms: Banking’s balancing act
Kuwait is liquid and managing a tough situation brought about by OPEC-led production cuts. In 2018, the country will be listed by FTSE in the secondary emerging market category boosted by Kuwait’s capital market regulatory changes, allowing it to benefit from an estimated $4.4 billion of passive flows.
But it’s the latest IMF consultation with Kuwait that really dispatched the good news about the country’s financial systems heading in the right direction. No wonder, in the latest Reuters Eikon, Markaz Research ranking of the top 10 companies in Kuwait, the National bank of Kuwait was top, immediately followed by Kuwait Finance House, while Boubyan bank, Ahli bank, and Gulf Bank took 5,7,8 positions respectively.
Where does that gulf country stand financially today?
As of Q2 2017, banks featured high capitalization (CAR of 18.3 per cent), steady profitability (ROA of 1.1 per cent), low non-performing loans (ratio of 2.4 percent), and high loan-loss provisioning (over 200 per cent coverage).
“Private sector deposit growth has declined in recent years, but this has partly been offset by an increase in public sector deposits, and some banks have also raised funding in international markets i.e Banks’ liquidity has been ample,” said the IMF.
Banks are under Basel III regulations for capital, liquidity, and leverage. A comprehensive set of macro-prudential measures is being enforced to minimize systemic risks.
“The mission welcomes the CBK’s continuous work to review the scope of its macro-prudential policy and its tools, to maintain a balance between preempting a build up in risks and stifling credit growth,” said the IMF.
“Kuwait is facing “lower-for-longer” oil prices from a position of strength, owing to large financial buffers, low debt, and a sound financial sector.”
Non-oil growth but GDP slump
After coming to a standstill in 2015, real non-hydrocarbon GDP growth has recovered and is set to reach 2.5 per cent this year, according to the international body.
“However, an OPEC-induced cut in hydrocarbon output by close to 6 per cent will bring overall real GDP down by about 2.5 per cent in 2017,” the IMF said
“Combined with the impact of lower oil prices on energy subsidies (some KD 2 billion, or $6.62bn), these efforts reduced current spending by KD 3.25bn ($10.76bn) over the past two years. The fiscal balance posted a large deficit (17.5 per cent of GDP) for a second year in a row.”
GDP growth to recover
The IMF expects Kuwait’s overall real GDP growth to pick up over the medium term with the overall fiscal balance projected to remain nearly balanced.
“The mission’s baseline scenario assumes oil prices at around $49 per barrel in 2017-19, increasing to about $52 per barrel over the medium-term. It also accounts for the introduction of a value-added tax (VAT) and excises on tobacco and sugary drinks, some increases in the price of government services, and full compliance with the recently announced three-year expenditure ceilings,” it said.
Gross financing needs will, however, remain large.
“A fiscal deficit of about 15 per cent of GDP annually will generate cumulative financing needs of some $100bn over 5 years.
The IMF said the Kuwaiti government has taken important initial steps over the past couple of years to advance energy and utility price reforms and rationalize other subsidies and transfers.
“Nonetheless, the total subsidy and transfer bill remains large. In addition to being costly, subsidies and transfers encourage excessive consumption and inefficient allocation of capital.”