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.
Dubai property prices to decline August 31, 2008
Posted by mylastresort in analysis.Tags: Apartment, Bonyan International Investment Group, Dubai, House, Property Prices, Real Estate, speculation, uae
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According to Bonyan International Investment Group the UAE mortgage market will tripple in the next 3 years to 64 billion dirhams, (KD 4.656 billion). Although I believe that Dubai’s residential property prices are expected to decrease about 10% within one year due to the over supply of newly constructed residential areas and the expectation that supply will increase while demand decreases in the coming years. In a move to discourage speculation, off-plan property sales must be registered with the land department and the developers will no longer be allowed to charge transfer fees. UAE’s housing rent jumped a staggering 18.8% in 2007.
Cheering rain in zel am see August 27, 2008
Posted by mylastresort in analysis.Tags: Arabs, Austria, Dubai, kuwait, Leo Bauernberger, Salzburg, saudi arabia, Tourism, uae, Zel Am See
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A small tucked away Austrian town in Salburg by the name of Zel Am See is home to approximatley 10,000 inhabitants. The small town has apparently emerged as Austrias second hottest spot for Arab tourists behind Vienna. Locals are amused by the behaviour of their Arab guests.
“When it starts raining, they run outside and cheer…”
-Leo Bauernberger, managing director of the local tourism authority
Atleast 1/3 of the 73,000 Arab tourists travelling to Austria per year visit Zel Am See. The visitors are mostly from Kuwait, Saudi Arabia, & United Arab Emirates. During the high season Arabian guests account for atleast 15% of the tourism, to the extent that several restaurants now offer halal food and the tourist information office recently hired 2 Arabic speaking staff.
“There must be some word-of-mouth recommendation in Arab countries that says one has to visit Zell am See at least once in a lifetime”
- Hans Wallner, Zel Am See hospitality Manager
DW increasing stake in Mirage August 24, 2008
Posted by mylastresort in analysis.Tags: Dubai, Dubai World, investment, MGM Grand, Sovereign wealth fund, uae
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New Jersey regulators have given the state owned investment group, Dubai World, approval to increase its stake in MGM Mirage by as much as 20%. MGM Mirage is one of the largest, most popular casinos in Atlantic City, New Jersey. I’m surprised at the freedom allocated to UAE sovereign funds since no other Gulf country may publicly invest in the ’forbidden’ industries. Dubai World is already the second largest shareholder in the entertainment firm.
In more recent news according to an IMF working paper, the UAE’s oil reserves could last 100 years at present output levels and fetch the country net wealth of $1.6 trillion.
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
100% Tax on Luxury Goods June 4, 2008
Posted by mylastresort in analysis.Tags: analysis, bahrain, Doha, Dubai, gcc, Gulf Cooperation Council, kuwait, Markets, oman, qatar, saudi arabia, Tax, taxation, uae, Value added tax, VAT
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The Gulf Cooperation Council (GCC) is planning to introduce up to 100% tax on ‘harmful products’ & luxury goods likely to include cigarettes, luxury cars, private planes, & yachts, among others. A team has been commissioned to list items that could be liable to the new tax from 2012. The GCC team looking into the proposed taxes would next meet in October. The GCC has already set 2012 as the deadline for implementing a new value added tax system.
Each of the Gulf countries suffers from lack of productivity and sophisticated staff, including a very bureaucratic environment in the public sector. The GCC is just that multiplied by 6, therefore I doubt any decision will be made anytime in the next 20 years regarding taxation (if anything useful).
Some notes to consider:
The rich - are the powerful - therefore taxing their latest toys will not make them very happy buying in their own countries and will therefore register items across borders. A good example would be to buy the yacht and register it in Yemen, for instance, and then take it to Dubai marina. This is a simple way to avoid taxes. This will move the companies to areas where the wealthy will pay a more reasonable rate than the 100%.
There will be an increase of ‘wastas’ (quanxi) at the ports and customs to avoid paying the tax. We are already bombarded by having to payoff officials to get the latest DVD, book or game in to the country just imagine bribing one of them to bring in a Ferrari, this will take things to a new extreme.
The Governments DO NOT need any extra income. The future plans and growth in Dubai, Bahrain, and Qatar all involve a marketing plan that clearly states ‘a tax free’ incentive for company’s & employees to relocate. Although everyone knows the slow pace of government policies any threats such as this will deter future companys/individuals from relocating.
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.
