Kuwait banks look to the state for action
Kuwait’s financial sector is counting on the country’s freshly elected parliament, youthful new central bank chief and record oil revenues to kick start the country’s moribund economy.
While its political environment has long been deadlocked by the battle between elected parliamentarians and appointed ministers, Kuwait’s economy, bankers say, needs decisive leadership from the government, both as a regulator and as an investor of windfall oil wealth.
As the global economic crisis took hold on Kuwait, its government needed to make bold steps to protect the vulnerable financial sector. Three years on, and with neither the banks nor the investment companies having rebounded convincingly, the industry is again in need of a decisive state, they say.
Yousef El-Ebraheem, economic adviser to Sheikh Sabah al-Ahmad Al-Sabah, the emir, says banks have “not fully recovered because of the debt to investment companies and real estate companies”.
“Some of these companies need a major decision to be made, to help them, merge them or just to write their death certificate,” he says. “These are the issues that need to be done by the new government.”
When the Kuwaiti government first responded to the financial crisis, banks and investment companies, linked through loans, received quite different treatment. Banks had their assets and deposits guaranteed alongside a financial package to help strengthen balance sheets.
A law was passed to support investment companies but the strict criteria for support meant many struggled to access it, keeping such companies wounded but alive.
High-profile defaults by Kuwaiti investment firms such as Investment Dar and Global Investment House shook the Kuwaiti banks to the core. However, analysts now say there are few surprises left among the scores of indebted investment companies. Banks are still slowly and painfully taking provisions.
Though the health of Kuwaiti banks has improved since the onset of the financial crisis, the recovery is not as strong as in other Gulf states. Earnings growth at the country’s top nine banks were flat in 2011, according research from Markaz, the Kuwaiti investment bank. In Saudi Arabia, the top nine reported a 14 per cent increase in earnings, and in the United Arab Emirates, the top banks reported a 28 per cent rise.
Although lenders did not receive the same level of government support as in Qatar, where the authorities bought real estate portfolios of local banks – among other measures – bankers say the government has for the most part handled the first phase of the crisis well.
Michel Accad, chief executive of Gulf bank, one of the worst affected during the crisis, says: “At the central bank level they have done what they needed to do, which is providing liquidity to the banks. The banks are in a strange situation because they would love to lend but there isn’t much demand.”
The comments, reminiscent of the position of Saudi Arabia’s banks before government spending started to trickle down, highlight how the lack of demand for corporate borrowing is preventing Kuwait’s banks from recovering more robustly. Corporate clients lack the confidence to embark on new projects, curtailing their appetite for borrowing, bankers say.
Mohammed al-Omar, chief executive of Kuwait Finance House, the country’s biggest Islamic lender, says: “In order for there to be demand they want to see the supply side on their spending.
Bankers are pinning their hopes on an acceleration of the government’s £71bn four-year development plan. The spending includes plans for privatisation, job creation and infrastructure upgrades but has been slow to take off amid the country’s political deadlock.
Mr Accad of Gulf Bank says: “If this comes back on track then you will see a much bigger demand from the system because this will have a trickle-down effect.”
In the first year of the four-year plan, only 61 per cent of the planned spending took place, highlighting the difficulty faced by the government in translating spending pledges into money flowing into the economy.
With corporate lending struggling to pick up, consumer lending is driving credit growth, thanks to generous government handouts. EFG-Hermes predicts that government spending will continue to be driven by public sector wage increases, and as a result, the bank forecasts private sector credit growth to remain weak this year, rising to 2.5 per cent from the year earlier.
Daniel Kaye, a senior economist at National Bank of Kuwait, says: “We’re getting back to an environment where credit growth is definitely more subdued. But it’s probably more normal, too.”