Money Supply

Kuwait’s broad measure of money supply (M2) sustained the upward trend seen for the last three consecutive months, yet a slower pace, to grow by around 0.1 Per cent or KD 24.5 mn during October-10 and stand at KD 25.2 bn at the end of the month; consequently, indicating an elevated liquidity in the economy and cash available with local banks. M2 continues to gain momentum, following the downward period that came as a result of the economic slowdown, hence indicating a gradual recovery mainly driven by the government commitment to implement its expansion plan. The increase in M2 during Oct-10 is mainly triggered by the increase in Net Foreign Assets with local banks which added around KD 230 mn; furthermore, quasi money, which has witnessed a general downward trend during 2010, grew by around KD 114 mn, to stand at KD 19.8 bn at the end of Oct-10.

Since the beginning 2010, M2 grew by a marginal 1.3 Per cent or KD 311 mn, in big part driven by the increase of KD 636 mn in the KD sight deposits that recorded KD 4.57 bn at the end of Oct; nevertheless, this growth was in large part offset by the drop of 1.7 Per cent or KD 347 mn in Quasi money. The growth in M2 since Dec-09 is still much lower than the 12.6 Per cent increase witnessed during the comparable period of 2009 where stock market volatility and low investors’ risk appetite played a key role in building up deposits with banks. Since the intensification of the financial turmoil in Sep-08, M2 surged 17.9 Per cent or KD 3.84 bn, with the bulk or around 59.5 Per cent out of which was added during Nov-08 and Feb-09.

Deposits with Local Banks
Total residents’ deposit continued the upward trend seen for the last three months to grow by around 0.3 Per cent or KD 90 mn, to end the month at KD 28.3 bn. Private sector sight deposits in Kuwaiti Dinar saw a drop of 1.3 Per cent or KD 61 mn, while on the other hand, Private sector and Government time deposits added around KD 72 mn and KD 55 mn, respectively. The upward movement in deposits with local banks during the current year give a relatively positive sign of the improved liquidity in the banking system; however, investors’ risk appetite is still wavering and the restoration of the confidence in the market is expected to require additional time supported by the positive performance of the local bourse which added as much as 14.25 Per cent YTD-10 as indicated by KAMCO TRW index.
During the ten month period ending Oct-10, total deposits with local banks have increased by a marginal KD 219 mn or 0.78 Per cent, compared to a growth of 13.2 Per cent in 2009, as a consequence of the high volatility in stock prices along with dull investment opportunities in the local bourse and the real estate market as a number of large financial institutions and real estate developers continue to suffer from high level of indebtedness and face unfavourable operating environment. This triggered a wave of flight to safety as investors preferred capital preservation rather than investing in risky capital markets.

Private sector deposits, holding a significant portion of local Banks’ deposit base with a percentage contribution of 86.2 Per cent, witnessed an increase of KD 53 mn during Oct-10 while registering an increase of KD 289 mn since the beginning of the year to record KD 24.4 bn at the end of October. Moreover, private sector deposits denominated in Kuwaiti Dinar compromised the majority of private sector deposits with a percentage contribution of 92 Per cent or around KD 22.4 bn, whereas private sector deposits in foreign currencies constituted the remaining 8 Per cent or KD 2 bn. Private sector deposits in foreign currencies grew for the third consecutive month by around 2.1 Per cent or KD 41 mn, following the downward trend witnessed since Dec-09 which was mainly triggered by the volatility in major foreign currencies, heightened financial market volatility.
Government deposits grew by 1 Per cent or KD 36.9 mn to record KD 3.91 bn at the end of the month, hence constituting around 13.8 Per cent of banks’ deposit base. After recording a significant increase of KD 449 mn in 2009, net government deposits over the ten month period ending October 2010 dropped by 1.8 Per cent or KD 70 mn.

Credit Facilities Extended
Subsequent to the strong growth recorded in credit facilities during 2004-2007, at an average of 27 Per cent, when non-oil sector activities were on the rise, credit to private sector remains subdued during 2010 following the considerable slow down from 17 Per cent in 2008 to 7 Per cent in 2009. During October-10, credit facilities extended by local banks to residents continued the slow-moving upward trend for the third month in a row to grow by a mere 0.2 Per cent or KD 47 mn and reach KD 25.1 bn. Given the minor growth seen during the last three consecutive months, total credit facilities managed to attain Dec-09 level despite the fact that the major drop seen during June weighed heavily on total credit facilities as it entirely offset the growth recorded so far this year, compared to a growth of 17 Per cent and 7 Per cent during 2008 and 2009, respectively.

The slowdown in credit facilities growth during 2010, is mainly as a consequence to the liquidity squeeze in the market, tight credit conditions, rise in default risk by stressed and highly indebted local firms along with the deterioration in the prices of financial assets which together pushed banks to implement conservative and strict lending policies particularly with the lack of attractive investment opportunities in the real economic sectors and the slowdown in the property market. However, the overall marginal upward movements seen during various months of the year indicate that the availability of credit has started to ease gradually, yet with considerable cautious by banks in extending loans.

Following the downward trend seen during the first half of the year on the back of the strict lending policies implemented by local banks, personal facilities during period June-Oct 2010 grew by 1.5 Per cent or KD 124 mn, to reach KD 8.43 bn at the end of Oct-10, comprising around 33.6 Per cent of banks’ total loan portfolios. Credit facilities for the purchase of securities represented around 32 Per cent of personal facilities and recorded around KD 2.68 bn, up by KD 23.5 mn from June-2010 level. The structure of the distribution in credit facilities with the highest percentage being in the stock market has exposed banks to a high default risk by individual investors who have highly invested in the local and regional bourses, thus resulting in massive provisioning by Kuwaiti banks since the onset of the financial crisis in 2008 on the back of the surge in non-performing loans which reached an unprecedented level during 2008-2009.

Loans to the real estate and construction sectors, which have together comprised an average of around 33 Per cent of local banks’ loan portfolios since Dec-08, grew for the third month in a row, yet at a slower pace, by around KD 7.9 mn to reach KD 8.24 bn at the end of October. Given the slowdown in the local property market and unfavourable operating environment faced by real estate companies and contractors in Kuwait, local banks’ exposure to this sector which is considered to be one of the highest in the Gulf region represented around 32.9 Per cent of local banks’ loan portfolios as of October-10.
Banks are still reluctant to extended additional loans to investment companies given the unclear outlook over the sector’s performance and in order to reduce the probability of default of loans; accordingly, credit facilities to stressed non-bank financial institutions i.e. investment companies (ICs) sustained the downward movement for the fourth month in a row, falling by around 0.7 Per cent or KD 19.7 mn during Oct-10 to reach KD 2.80 bn representing around 11.2 Per cent of banks’ loan portfolios. Since the beginning of the year, loans to ICs saw a drop of 3.34 Per cent or KD 96.7 mn as local banks are following strict lending policies due to the deterioration in ICs’ investment portfolios along with unfavourable operating environment and insolvency issues faced by some major player in the financial services and investment sector.

The following chart, which depicts the change in outstanding loans across the major economic sectors during the last twelve month periods ending Oct-09 and Oct-10, reflects the sluggish growth in credit, particularly to real estate and households (personal facilities), due to strict lending policies followed by local banks triggered by tight credit condition and erosion of individuals’ wealth.
For the trailing twelve months period ending Oct-2010, credit extended to the Real Estate sector registered a drop of KD 95 mn, lagging behind the KD 867 mn extended in the comparable period of 2009. Growth in personal facilities lost momentum relative to the comparable periods, while credit to construction sector added around KD 119 mn in comparison with a drop of KD 82 mn during the comparable period of 2009; this growth is mainly driven by the rise in government’s spending on infrastructure projects that encouraged banks to extend more loans to contractors. Personal facilities increased at a slower pace or by KD 129 mn in the TTM period ending Oct-10, compared to KD 593 mn over the comparable period of 2009, driven by the restrictions recently introduced by the Central Bank of Kuwait on customer lending which stipulates the reduction of total monthly loan instalments per individual from the previous 50 per cent of the salary to 40 per cent, and to 30 per cent in the case of retirees; whereas, Trade loans and loans to industrial sector saw an increase of KD 131 mn and KD 153 mn compared to KD 34 mn and KD 23 mn during the same period, respectively.

About KAMCO
Established in 1998 with the mission to significantly alter the local and regional investment landscape, KAMCO is a premier investment company based in Kuwait. A subsidiary of United Gulf Bank (UGB) - the investment banking subsidiary of Kuwait Projects (Holding) Company (KIPCO) - KAMCO was listed on the Kuwait Stock Exchange (KSE) in 2003.
After twelve years of conducting business in Kuwait’s dynamic investment industry, KAMCO has successfully established a robust reputation for solidity, characterized by its prudent, conservative investment philosophy which has consistently commanded the goodwill of a wide patron-base.
KAMCO’s Asset Management Division specializes in customized portfolio management, forward trading, access to IPOs, and local and international fund management. The Investment Advisory and Research Division tracks the latest directions and trends across regional and local economies as well as equity markets and offers a range of customized services that focus on maximizing returns, mitigating risks, and maintaining capital appreciation for individual and institutional clients. The Company’s Financial Services and Investment Division offers a full range of advisory services on mergers and acquisitions, underwriting, private placements, debt issuance and restructuring, and private equity management.
In 2010, the Company will further aggressively build upon its core competencies to offer MENA-wide investment management consultancy and services, backed by its proven track-record in stringent risk mitigation, investment product innovation, and a cautious investment approach towards local, regional and international capital markets.