“Natural” Market Cycle in Kuwait September 16, 2008
Posted by mylastresort in analysis, bahrain, qatar, rumors, saudi arabia, sovereign funds.Tags: gcc, Government Interfernce, Gulf Collapse, kuwait, Markets, Stock Exchange
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The significance of Lehman Brothers collapse is of extreme importance to the local region to understand the events that occurred leading to its bankruptcy. In the GCC the markets have enjoyed prosperity for so long that they have forgotten that markets do fall, and fall hard fast. Since the beginning of September the Gulf Markets have been tumbling to record levels. In a single session, Dubai fell an unprecedented 12% and Kuwait approached the bottom limit of a -587 points drop, among many other significant declines. (more…)
Part 3: The Collapse of the KSE September 9, 2008
Posted by mylastresort in analysis, qatar, saudi arabia.Tags: bahrain, Central Bank, Central Bank of Kuwait, Collapse, economy, Government, inflation, KSE, Kuwait Stock Exchange, qatar, Regulations, uae
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Kuwait’s Neighboring Nations
In Bahrain and the United Arab Emirates (UAE) riots began to proliferate among residents demanding action due to the rising prices in consumer goods. Doha and Dubai pride themselves as being tax havens while avoiding to mention double-digit inflationary figures. During the summer of 2008 all of the Gulf countries had peaked to record inflation levels never before experienced in the region.
The Lender of Last Resort
One of several methods to drain liquidity from the markets would be to increase interest rates to levels that would tempt investors to leave the exchange and head to the banks. The Central Bank of Kuwait (CBK) had failed to affect the markets in its previous attempts at raising rates therefore decided to force banks to increase rates without hiking the discount rate, by altering the money supply.
During July 2008 banks experienced a severe loss of liquidity in the market that forced banks to rapidly increase rates in an attempt to remain solvent and avoid the penalties set by the lender of last resort. Short-term deposit rates increased dramatically as banks battled for funds in order to remain solvent. Market participants finally recognized that banks were offering attractive rates that were enough to make them shift to deposits. During the period, banks were behind hundreds of thousands of dinars per day in penalties and exaggerated deposit rates forcing the central bank to flood the market with funds to avoid creating a new crisis.
Part 2: The Collapse of the KSE September 8, 2008
Posted by mylastresort in analysis, bahrain, qatar.Tags: bahrain, Central Bank, Central Bank of Kuwait, Collapse, economy, Government, inflation, KSE, Kuwait Stock Exchange, qatar, Regulations, uae
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The CBK Regulations
The Kuwait Stock Exchange (KSE) had exhausted all locally available funds by 2005. Beginning in 2006 the market was increasing based on the concept that investors who entered into new positions were not selling shares in the market to buy new ones rather they were trading on leverage, obtaining bank loans, or selling foreign assets to acquire additional exposure in the surging market. The regulators acknowledged the pending epidemic and set up sequential regulations at drying up liquidity in the market to contain inflation.
The Single Gulf Currency
Beginning in 2004 serious discussions between the six GCC nations began regarding the unification of the Gulf’s currency. Central bank Governors would hold regular meetings to discuss methods and deadlines for the process. The Governors decided that no major changes to currency policy would occur and that inflation must be contained to strict measures prior to the 2010 deadline. Following a regular meeting in May 2007 the Central Bank of Kuwait unexpectedly announced that it has entered into a currency basket, citing that the falling US dollar would boost inflation if the country remained in a pegged exchange rate system. The move astonished other members of the GCC since the move was in direct violation of the terms the countries agreed upon hours earlier. The currency revaluation was one of the the earliest moves the CBK had undertaken to combat the predicted inflationary threats of today.
The Regulations
In the short period following the Kuwait Stock Exchange (KSE) reaching the 10,000 points level the Central Bank of Kuwait (CBK) would unleash several coordinated regulations each serving the same purpose: Contain inflation. The CBK would allow listed companies to call for capital increases. Many companies increased capital, sending frantic investors to local banks to obtain loans. Then the first of the major regulations occurred, the CBK abruptly prohibits real estate investment and its use as collateral for borrowing purposes. The move prevented many from increasing debt to finance new investment opportunities. The move also sends the real estate market to decline by up to 40% in some areas forcing investors increase collateral or repay loans.
The CBK continued to allow companies to raise capital sending investors to the banks once more, this time to get consumer loans (without collateral) and placing the funds in the exchange. The central bank was adamant at ending leveraged positions in the markets, hence it announced a cap on consumer loans forcing market participants to only use available cash to invest in the exchange. No longer could individuals obtain massive loans to invest in the booming markets. The central bank predicted that the inflation rate would finally decrease. Soon after, the CBK surprisingly announced the highest inflation on record.
Part 1: The Collapse of the KSE September 7, 2008
Posted by mylastresort in analysis, bahrain, qatar, saudi arabia.Tags: bahrain, Central Bank of Kuwait, Central banks role, Collapse, economy, Government, inflation, KSE, kuwait, Kuwait Stock Exchange, Part 1, Part 2, Part3, qatar, Regulations, uae
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The recent collapse in the Kuwait Stock Exchange (KSE) index this past week has not been given its proper placement in the headlines. I have found it difficult to find resources covering the details of the collapse or reasons justifying the decline. Some might hail the events as a market correction but I believe the reasons are far more complex and intertwined with recent economical events in the country.
This post will be composed of 3 parts.
A Brief History of the Local Economy
Economies across the globe experienced massive economic prosperity beginning after the millennium ending in 2007. Emerging markets were recognized as superior untapped resources by some of the leading financial institutions. Several companies relocated to the third world in a race to attract as much wealth as possible. Investors in New York, London, and Paris devised plans to invest in countries they could not locate on maps. During the same time Kuwait experienced its own expansion of economic growth.
The rush of riches to the citizens from a single source in a rapid pace began worrying regulators. The Kuwait Stock Exchange (KSE) index multiplied exponentially in 10 years from 98 to 08. During this short period, college graduates headed directly to the exchange for employment regardless of specialization. Housewives began exchanging stock tips. Industrial and service companies began trading the markets neglecting their core businesses. Investment companies began propping up across the horizon. They all shared the same objective: To generate as much wealth in the shortest time possible. In order to maintain economic stability in the nation the central bank of Kuwait would need to act by containing growth to prevent surging inflation.
CBK Vs the Government
The Central Bank of Kuwait (CBK) has recently been finding it difficult to contain inflation using conventional methods. Central banks around the globe use their power to predict the future behavior of markets and adjust interest rates, money supply and use influence to guide markets in controlled movements. The central banks are capable of requesting aid from the governments to fight sudden implications, but of course the central bank is not required to act when the government requests certain actions from it. Also, the central banks must be independent from local politics and unbiased in their decision-making. These are core fundamentals that allow the central banks to operate in the most proficient manner possible.
In Kuwait however, the methods are different. During a year of record inflation parliament announces the highest spending budget in history, an increase in wages, demands decreasing the dicount rate, and finally the dissolution of consumer loans. The government’s actions were all created with the CBK’s direct objection proving that the government will not aid the CBK in preserving the economical well being of the country. The governments actions would prove catastrophic to the economy if left unabated therefore the CBK must act swiftly and alone to correct the government’s blunders.
Ramadan starts inflation surges… September 1, 2008
Posted by mylastresort in analysis, qatar, saudi arabia.Tags: Food, Gulf, inflation, Islamic, qatar, Ramadan, saudi arabia
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In Saudi Arabia a report stating that personal loans rose 25% ahead of the start of Ramadan (Islamic month of fasting) due to the rise in food prices. Another report in Qatar reveals that the prices of fruits and vegetables have risen 30% to 45% ahead of the start of the holy month. It is clear that businesses are exploiting the religious month and deliberately hiking prices of necessary products. It is also apparent that the prices are being fixed so that competition cannot discount such items. It is clear that no government intervention via subsidies, control, or import fees will take place since some powerful individuals tend to benefit the most from the lower class burdens.
Gulf Countries Delay Currency Union June 10, 2008
Posted by mylastresort in analysis, bahrain, qatar, saudi arabia.Tags: Central Bank, Currency Union, gcc, Gulf, Gulf Cooperation Council, Single currency
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Central bank governors from the Gulf Cooperation Council (GCC) agreed to form the nucleus of a joint central bank by 2010 in a major step forward for monetary union but signalled that the new common currency would be delayed (as explained in previous posts) and not launched by the 2010 target.
Record-high inflation in all the countries in the GCC is threatening to derail the project. Central bank governors from the GCC laid out a roadmap leading toward common monetary institutions before 2010. It seems very optimistic that with all the economic dilemma’s we are facing the Gulf the central banks still believed that we could form the single currencyCurreny Union by 2010.
A List of Major Gulf Projects June 5, 2008
Posted by mylastresort in analysis, bahrain, qatar, saudi arabia.Tags: Abu Dhabi, Al-Uqair Tourism Development Project, Aldar - Yas Island Project, construction, Culture Village Project, Dubai, Duqm New Town Project, Forecast, King Abdullah Financial District Project, kuwait, Masdar City Project, Mohammed bin Rashid Gardens Project, oman, Outlook, Projects, Sama Dubai-The Lagoons Project, saudi arabia, Tatweer Badawi Project, uae, United Arab Emirates
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Here is a list of major projects currently underway in the Gulf:
Kuwait
Silk City Project, Value $77 billion
Planned completion: Q4 2030
Current stage: Planning
Dollar peg will not help inflation June 2, 2008
Posted by mylastresort in analysis, qatar, rumors, saudi arabia.Tags: Abu Dhabi, currency, Dirham, Doha, Dollar, Gulf, Henry Paulson, inflation, Pegs, qatar, Riyal, Treasury Secretary, uae, US
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According to U.S. Treasury Secretary Henry Paulson abandoning the Gulf’s currency pegs to the dollar will not solve their vexing inflation problems. Speaking to reporters on his plane from Qatar to UAE, Paulson said the Gulf rulers in the region have… “quite an awareness that the peg does not influence inflation to a significant degree… They recognize that inflation is the overriding issue. Ending the peg is not the solution to the inflation problem.”
Economic policy is not a politcal decision that can be altered via public relations, it is a sovereign matter. Paulson stated that he could not rule out any moves by Gulf states to abandon their peg’s.
Gulf currencies collapse 40% April 8, 2008
Posted by mylastresort in analysis, bahrain, qatar, rumors, saudi arabia.Tags: AED, bahrain, BHD, Central Banks, Currencies, Dirham, Dollar, Dubai, gcc, Gulf, kuwait, KWD, oman, OMR, qatar, Revaluation, saudi arabia, Saudi Riyal, US
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Many have called for a revaluation of Gulf currencies from the historical dollar peg. The flood of liquidity and rapid inflation has been hailed as a warning to the falling interest rates, decline of the US Dollar, and record high oil. The loss in value of the Gulf currencies has been partially responsible in the rise of inflation. The inflationary pressures, which should govern an increase in rates by the central banks, have created markets so liquid that deposits are being quoted at negative rates. The list below shows the Gulf currencies depreciation, in value, due to the Dollars decline.
Why the single Gulf currency will not happen… April 7, 2008
Posted by mylastresort in analysis, bahrain, qatar, saudi arabia.Tags: Arab Gulf, currency, Dinar, Doha, gcc, Gulf currency, Meeting, Single, Union
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Following the central bankers meeting in Doha this week its clear they are all enthusiastic and confident in the 2010 unified Gulf currency, known as the ‘Dinar’. The expected time frame for the single currency is on the extreme side of optimism, (also note, I am very skeptical that a single currency will be adopted in the first place). There are many obstacles that must be overcome before discussing a unified currency. The Gulf, although neighbors, do not share the same political veiws, economic reform or civil freedoms, among many other factors that will be of prime importance to the unification of the currencies.
