Saudi Government Subsidies in Default September 11, 2008
Posted by mylastresort in analysis, saudi arabia.Tags: commodities, inflation, Okaz, Ramadan, Rice, SAR, saudi arabia, Subsidy
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The Saudi Arabian government decided to subsidize rice at SAR 1000 per ton. Rice importers in the country have been waiting for payment from the government for the past 5 months. The companies are complaining publicly through the press due to the government authorities lack of importance in this matter. While these companies must pay salaries and bills the government is seeking new excuses. Any future decision of the government to interfere in the private sector has been hampered by its bureaucracy (or corruption, or both) in this situation.
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.
Kuwait posts budget surplus September 1, 2008
Posted by mylastresort in analysis, sovereign funds.Tags: economy, inflation, Kuwait Investment, Oil, politics, Surplus
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Higher oil revenues helped boost Kuwait to a preliminary surplus of KD 3.8 bil ($14.22 bil) in the first quarter of its 2008/09 fiscal year. Oil revenues for the first 3 months was KD 6.29 bil compared with a forecast KD 11.65 bil for the fiscal year which starts in April 1. Kuwait’s budget was based on a conservative oil price estimate of $50 per barrel.
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Kuwaiti parliament approved a budget with a record expenditure of KD 19 bil dinars (despite warnings by the central bank to contain spending to tackle record inflation)
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Kuwait invests 10% of its revenues in a fund for future generations
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A surplus means Kuwait Investment Authority (Kuwait’s sovereign fund) has more funds to spend on foreign investments
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.
Kuwait inflation in double digits August 31, 2008
Posted by mylastresort in analysis.Tags: banking, CBK, Central Bank, CPI, Econony, inflation, kuwait, National Bank of Kuwait, NBK, Reseach
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Kuwaits year-on-year inflation will remain in double digits despite governments plans and Central Bank intervention. The Central Bank of Kuwait (CBK) clamped down on credit and money growth in a bid to drain excess cashflow resulting from high oil revenues. In January CBK Governor Sheikh Salem Abdulaziz AlSabah warned that high inflation constituted a “national challenge” for the oil-rich emirate.
“Inflation should ease as a result of slower economic growth, lower commodity prices, months of tighter money” [and the dinars appreciation against the dollar]
- National Bank of Kuwait
For the past 4 weeks local banks were suffering from a liquidity crisis pushing rates higher for short term deposits. The currency has appreciated 9% since the government dropped the dinars peg to the US currency in May of 2007. Inflation rose to double digits in February (for the first time) to reach a staggering 10.14%, then dropped slightly in March to 10.1%, lastly hitting 11.1% in May.
“NBK expects to see year-on-year CPI [Consumer Price Index] rates in the seven to eight per cent range from now to year-end and that would put 2008 inflation at 10 per cent for the year, compared to 5.5 per cent in 2007″
- National Bank of Kuwait
A report released by National Bank of Kuwait (NBK) said it expects a slight drop in inflation figures for the rest of the year on the back of falling world food and commodity prices. The report expected a sharp rise in prices in September during the holy month of Ramadan.
Warren Buffett to remain bearish August 25, 2008
Posted by mylastresort in analysis.Tags: Berkshire Hathaway, economy, inflation, investment, recession, US, Warren Buffett
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In a recent article Warren Buffett claimed that the expects a few more bank failures and claims the housing market to remain ‘tough’ over the next 18-24 months. He anticipates a slow recovery in the US economy and does not expect any improvement prior to 2009. Buffett added, Berkshire Hathaway has no bets right now on currencies but is calling the stock markets ‘more attractive’ than a year ago.
This week Warren Buffett toured Canada’s oil sands with his friend Bill Gates this week to understand how the resources are developed, but the billionaire investor said he had no plan to buy into the sector.
“No, no. I go to the movies, but I don’t buy movie companies. I mean, I’m always interested in understanding the math of things and understanding as much as I can about all aspects of business… And what I learn today may be useful to me two years from now. I mean, if I understand the tar sands today and oil prices change or whatever may happen, I’ve got that filed away and I can use it at some later date.”
- Warren Buffett
Inflation in Kuwait during Ramadan August 24, 2008
Posted by mylastresort in analysis, random.Tags: al-Watan, inflation, kuwait, Ramadan, Survey
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In Kuwait prices of some brands of cooking oil, mince meat, sugar and pasta rose by between 10% and 42% ahead of the start of the Islamic holy month of Ramadan. It is common during the holy month of ramadan for businesses to exploit customers in order to increase profit margins. Although, it is ironic that during the holy month of fasting, demand for food increases (albeit the reasons are logical). The governments plans to curb inflation in the short term will be halted during the month when employee productivity levels in all sectors decrease, food prices increase, and congestion is exponentially increased.
* Percentages are based on a survey conducted by al-Watan newspaper
Update 26/8/08: The Union Cooperative Society (similar to a supermarket association) in the UAE has just announced that it has slashed prices of 30 major commodities by atleast 25% for the month of Ramadan. The UAE economy ministry has reiterated a warning that it would punish supermarkets that raise prices of goods in an unjustified way. In Kuwait the same warning was issued (numerous times) all the while prices kept rising upto 40% ahead of the holy month starting in September.
Kuwait’s inflation rate at record high June 3, 2008
Posted by mylastresort in analysis.Tags: economy, February, inflation, kuwait, Record
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Kuwait’s inflation rose for a third month reaching a new record high of 10.14% driven by higher food costs and rents.
- Housing costs rose 16.1%
- Food costs gained 9.22%
- Beverages and tobacco increased 14.9%
The All Items Consumer Price Index advanced to 127.1 points in the year to the end of February from 115.4 points states the Central Bank of Kuwait’s website.
Previous inflation figures were as follows (chronological):
- October 7.26%
- November 6.68%
- December 7.54%
- January 9.5% (previous record)
- February 10.14% (new record)
