KUWAIT CITY, May 17: Kuwait’s broad measure of money supply (M2) remained almost stagnant in March 2011, following last month’s significant increase of 6.3 per cent or KD 1.61 bn, to record a marginal increase of around 0.1 per cent or KD 28.4 mn and stand at KD 27 bn.

The increase in M2 during the month was mainly driven by an increase of KD 123 mn in KD sight deposits, or 2.3 per cent to stand at KD 5.5 bn by the end of March 2011; despite a drop in currency in circulation of KD 89.6 mn over the period. Net Foreign Assets (NFA) with The Central Bank saw a decrease of KD 24.3 mn; while on the other hand, Net Domestic Assets (NDA) increased by KD 298 mn on the back of the increase in government deposits and other accounts by around KD 74 mn and KD 241.4 mn, respectively.

During Q1-2011, M2 rose by around 6 per cent or KD 1.52 bn, driven by the Amiri grant of KD 1.1 bn distributed to Kuwaiti citizens in Feb-2011, compared to a marginal growth of 2.4 per cent or KD 590 mn during FY-10. The growth recorded in M2 during 2010 was much lower than the 13.9 per cent increase witnessed during 2009 where stock market volatility and low investors’ risk appetite played a key role in building up deposits with banks. Moreover, since the intensification of the financial turmoil in Sep-08, M2 surged by 26.1 per cent or KD 5.6 bn, with the bulk or 51.1 per cent added during February 2009 & 2011. Nevertheless, given the stringent lending strategies applied by local banks due to the higher risk of default by distressed companies, particularly investment firms, the growth in money supply was not successful in triggering an upward stimulus in credit facilities.

Deposits with Local Banks
Total residents’ deposits continued last month’s upward movement to rise by 0.9 per cent or KD 259.5 mn, to end the month at KD 29.86 bn. Private sector KD sight and saving deposits added around KD 123 mn and KD 88 mn, respectively, while on the other hand, private sector deposits in foreign currencies grew by 0.5 per cent or KD 12 mn.

Private sector deposits, which hold a significant portion of local Banks’ deposit base with a percentage contribution of around 87.2 per cent, increased by KD 118 mn or 0.5 per cent to stand at KD 26.04 bn during Mar-11, therefore adding around 5.7 per cent or KD 1.39 mn during Q1-2011 while registering an increase of KD 523 mn or 2.17 per cent during FY-2010. Moreover, private sector deposits denominated in Kuwaiti Dinar represented the majority of private sector deposits with a percentage contribution of 91.3 per cent or around KD 23.78 bn, whereas private sector deposits in foreign currencies constituted the remaining 8.7 per cent or KD 2.26 bn.

Credit facilities extended by Kuwaiti Banks
During March-11, credit facilities extended by local banks remained stagnant, increasing by a marginal KD 15.2 mn, to reach KD 25.3 bn and therefore adding a marginal KD 65 mn or 0.3 per cent during Q1-2011. Given the mixed movements seen during 2010, credit facilities recorded a yearly growth of 0.4 per cent, or KD 100 mn, 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 and Q1-2011, is mainly due 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.

Personal facilities which constitute the largest component of credit facilities increased by a marginal 0.02 per cent or KD 1.8 mn to stand at KD 8.42 bn at the end of March 2011, hence comprising around 33.3 per cent of banks’ total loan portfolios. Credit facilities for the purchase of securities represented around 31.1 per cent of personal facilities and recorded around KD 2.62 bn, down by 1.3 per cent or KD 35.3 mn from Feb-2011 level. The structure of credit facilities with the highest percentage being in the stock market has exposed banks to a high default risk by individual investors who are heavily 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 or around KD 2.99 bn and KD 2.50 bn at the end of 2009 and 2010, respectively.
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 by a marginal 0.9 per cent or KD 78 mn to KD 8.41 bn at the end of Mar-11. Given the slowdown in the local property market and unfavorable operating environment faced by real estate companies and contractors in Kuwait, local banks’ exposure to this sector indicates that further weakness in the property market might expose local banks to credit risk.

Banks are still reluctant to extended additional loans to investment companies (ICs-Non-bank financial institutions) given the unclear outlook over the sector’s performance and to avoid further provisioning; accordingly, credit facilities to stressed ICs showed a drop from Feb-11 to stand at KD 2.73 bn at the end of Mar-11 and represent around 10.8 per cent of banks’ loan portfolios.

The following chart, which depicts the change in outstanding loans across the major economic sectors during the comparable last 12-month period ending March 2010 and 2011, reflects the contraction in credit to real estate sector and a sluggish growth in personal facilities due to strict lending policies followed by local banks on the back of the tight credit condition and erosion of individuals’ wealth.
Growth in credit extended to the real estate sector during the last 12-month period ending Mar-11 slowed down to KD 81 mn, from to KD 416 mn witnessed during the comparable period ended Mar-2010. Growth in personal facilities lost momentum, while credit to construction sector added around KD 79 mn in comparison with a drop of KD 9 mn during the last 12 months ending Mar-2010; this growth is mainly driven by the rise in government’s spending on infrastructure projects that encouraged banks to extend more loans to contractors. Growth in personal facilities was close to zero compared to an increase of KD 458 mn in the 12 months ended Mar-2010. The Industrial sector has gained the lion’s share of additional credit extended by local banks with total new credit of KD 179 mn versus a drop of KD 3 mn in the comparable period ended March-10. This revive in credit to the industrial sector is mainly driven by the banks’ new strategies that became more directed towards lending to the real economic sectors that have low default risk and backed by generating real cash flows.