Part 3: The Collapse of the KSE September 9, 2008
Posted by mylastresort in analysis, qatar, saudi arabia.Tags: inflation, uae, qatar, economy, Central Bank of Kuwait, Kuwait Stock Exchange, Government, Central Bank, bahrain, Regulations, KSE, Collapse
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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: inflation, uae, qatar, economy, Central Bank of Kuwait, Kuwait Stock Exchange, Government, Central Bank, bahrain, Regulations, KSE, Collapse
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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.
Slavery in Kuwait April 13, 2008
Posted by mylastresort in analysis.Tags: economy, Expatriate, Government, India, kuwait, Salary
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Citing a report, a local company has not paid – over 100 – of its Indian employees for seven months. Residency permits for the laborers are expiring soon, or are past expiration, and claims of threats, by the unnamed company have been instigated to the workers. In 2008 and following the ‘model contract’ the two countries (India and Kuwait) signed earlier this year should put an end to this type of human abuse. The company is maintaining a government contract for the employees it is using as slaves. Steps by the government to fine the company and make an example of it to all future companies who plan on abusing the unskilled expats in the country to get government contracts should be taken.
KD 140,000 dilemma – Real Estate April 3, 2008
Posted by mylastresort in analysis.Tags: Banks, Central Bank, Companies, construction, Government, Ijara, kuwait, Land, Law, Parliament, Prices, Real Estate, Recent, Regulation
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The price of real estate in Kuwait had risen to ridiculous levels. Inflation in the country had risen to 6.7% in November ‘based on a 12.6% jump in housing’. A new law passed by Parliament prohibited banks and real estate companies from investing in residential real estate. Then a series of regulations passed by the central bank of Kuwait minimized the loans citizens could take to purchase homes. Real estate in Kuwait fell 20% – 40% in some areas.
Kuwait’s policy strategy plan 2009 – 2014 April 2, 2008
Posted by mylastresort in analysis, bahrain.Tags: Arab, bahrain, Countries, Dubai, Future, Government, Gulf, Investments, kuwait, Kuwait City, Kuwaiti, Manama, Oil, Outlook, Parliament, Policy, Policy strategy, Report, Strategy, uae, United Arab Emirates
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Information in a 2009 – 2014 policy strategy plan formulated by Kuwait’s planning council has been made public. The policy strategy is not strictly adhered to, nor is it marketed to the public, rather it is just a report amid many reports circulated by the government.
Here are a few of the plans:
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Boost non-oil economy (at less than 10% of revenue)
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Increase foriegn investment (become a financial hub)
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Sell land/Ease ownership rules (in preparation of post-oil era)
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Continue privatizations (eg. selling of Kuwait Airways Corp.)
Future of Kuwait’s banking sector March 31, 2008
Posted by mylastresort in analysis, rumors.Tags: Ahli, Bank of Kuwait, Banking Sector, Banks, Burgan, CBK, Central Bank of Kuwait, Commercial, economy, Effects of politics, Government, Industrial, inflation, kuwait, Kuwaiti, Loans, National
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The Central Bank of Kuwait’s recent steps in an effort to reduce the money supply and eventually lower inflation will have severe consequenses on the local banking sector. To recap the following steps were taken by the CBK:
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Consumer loans cap will be 40% of salary, from 50%
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Pensioners loans’ cap to 30% of income
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A new limit on interest rates of 3% over discount rate, from 4%
The banking sector in general relies heavily on lending funds to consumers at high rates at long term intervals. The loan cap on potential customers will decrease the amounts banks can lend and along with the limits on the interest rate charged will lower returns on the already decreased amounts taken. This step in itself will lower the revenues’ for the banking sector which will be evident in the 2009 statements. My prediction is that, based on the new regulations, banks’ revenues will be between 20 -25% lower than last year. (more…)
Kuwaiti elections and economy March 23, 2008
Posted by mylastresort in analysis, rumors.Tags: analysis, Bad Debt, Cabinet, Citizens, Debt, Dewaniya, Economic, economy, Elections, Employment, Government, Gulf, investment, kuwait, Parliament, Permits, Political, politics, Risk, Salary
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Political risk is of high importance when measuring risk prior to an investment. The recent laws concerning real estate investments in the gulf country have decreased some land values upto 40%. Economic performance, especially in the real estate sector, is strongly linked to the politics of the country. Plans of transforming the country into a regional financial and commercial center have come and gone, repeatedly.Kuwaitis in general are extremely dependent on the government. The recent debacle of dewaniya demolition, bad debt repayment, salary increase and again, salary increase have shown the direct correlation the citizens place between the parliament and their pockets.
A Kuwaiti citizen is like an employee in a family company on vacation all year round and repeatedly asking for a pay raise. They are guaranteed employment and receive an increase in wages (regardless of contribution).
Kuwait has fallen behind its Gulf neighbors economically, but not politically. If the Gulf state can repair its political situation then it can begin to prepare its economic agenda. The plan for a regional financial hub, commercial center or logistics center for the region will only occur once the political sector is stable, sophisticated and willing to work based on ethics rather than vote count.Also see “Kuwaiti parliament and economy“
Kuwaiti parliament and economy March 20, 2008
Posted by mylastresort in analysis, bahrain.Tags: Bad Debt, bahrain, Debts, Deputy, Dubai, Economic, Elections, Emir, Finance, Government, Growth, Gulf Consulting Company, kuwait, Kuwaiti, May, Mustafa Behbehani, Parliament, politics, Reform, Regulators, Sabah, Stock Exchange
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News that the parliament would be dissolved sent the Kuwait stock exchange index up 1.54% to its biggest one day jump in two weeks, and a record high (14,445.40 points). Newly elected members would be seen to push through policies to spur economic growth in the country.
“There is a big disappointment with this assembly which has hindered economic reforms… there is hope that things will move in the right direction with a new assembly”
- Mustafa Behbehani, Head of Gulf Consulting Company
The long-term plan for Kuwait would be to mimic its Gulf neighbors and diversify its economy away from oil, such as Bahrain and Dubai, who have already established themselves as regional financial centers. (more…)
Kuwait posts record gains March 19, 2008
Posted by mylastresort in analysis.Tags: Billion, Budget, commodities, Crude, Estimates, Finance Ministry, Government, kuwait, Oil, Record, Revenue, Surplus
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Kuwait has posted a record revenue of KD 17 billion ($63,600,000,000) for the first 11-months of the fiscal year.
Here are some facts: (more…)
