DUBAI, Oct 24, (RTRS): Kuwait’s central bank is greatly concerned by Europe’s debt crisis and its possible impact on the stability of banks there, but it believes Kuwaiti banks are in good enough shape to withstand big global shocks, its governor said.
“The precarious situation with sovereign debt in some European economies, and most recently the possible impact on banking stability in Europe, are major concerns to us in Kuwait,” Sheikh Salem Abdul-Aziz Al-Sabah said in an e-mailed response to Reuters questions.
Despite a decrease in crude oil prices in the past six months, Kuwait’s economic growth is expected to accelerate to 4.7 percent this year, a Reuters poll showed in September , from 3.4 percent estimated by the International Monetary Fund for 2010.
“We believe...that the Kuwaiti banking system is in quite a good shape to withstand extraordinary global shocks,” Sheikh Salem said.
“By any standard, Kuwaiti banks are presently well capitalised including conservative leveraging ratios. Equally important, our supervisory reviews show our banks have more than ample liquidity.”
Fitch Ratings said in July that despite an improving operating environment, large exposures to construction, real estate and investment companies and speculative stock-market lending were a common feature across Kuwaiti banks, posing risks.
In August, the IMF said any further deterioration in balance sheets of loss-making investment companies or delays in their debt restructuring could hit the profitability of banks, whose average capital adequacy ratio edged up to 19 percent in 2010.
Private sector deposits in Kuwaiti banks grew to a record high of 26.5 billion dinars ($96.2 billion) in September, the central bank’s data show.
The central bank has put in place several measures to better monitor local lenders, Sheikh Salem said. It also launched a new Financial Stability Office in August.

Urgent reforms
Kuwait’s top policymakers, including Sheikh Salem, called on the government this summer to correct imbalances in the oil-reliant economy and trim budget waste, though analysts have said political frictions between the cabinet and parliament may slow that push.
The world’s No. 6 oil exporter needs mainly to tackle imbalances related to the general budget, the labour market and the role of the private sector, which reflect the government’s dominance in the economy, Sheikh Salem said.
“Addressing them requires a redefinition of that role through a comprehensive reform program. The challenges are structural and require persistence,” he said.
“Therefore it is essential and urgent that significant reform steps are taken at this stage, because further postponement and delay will reduce the options available and further increase their cost.”
Fiscal reform should gradually reduce current expenditures and enhance non-oil revenues, Sheikh Salem said.
Kuwait, with 3.6 million people, depends on income from crude oil for around 93 percent of its government budget, the most among oil-exporting Gulf countries. Despite its wealth, the state-dominated economy has drawn few foreign investors, unlike nearby Qatar and the United Arab Emirates.
Since 2004, Kuwait’s projected budget spending has tripled to a record 19.4 billion dinars planned for the 2011/12 fiscal year, which started in April, with expenditure on wages for government employees rising almost as fast.
Parliament cleared a $110 billion, four-year development plan in February 2010 to diversify away from oil and boost the private sector, which accounts for a quarter of the economy. But the plan is still mostly on paper as political conflicts have hindered concrete action.
Sheikh Salem also said monetary policy was comfortable: “We believe that the current interest rate settings are appropriate and accommodative with the prevailing economic and financial conditions both domestically and internationally.”
He added, “Needless to say that we continue our monitoring of developments and stand ready to take necessary actions, if needed, to support our domestic economy.”
The central bank last cut its key discount rate by 50 basis points to 2.50 percent in February 2010 . Kuwait pegs its dinar to a currency basket, believed to be heavily dollar-weighted, after dropping a direct peg to the greenback in 2007.

Highlights
Following are comments by Sheikh Salem Abdul-Aziz al-Sabah e-mailed to Reuters.
On Euro crisis
“As with virtually all central banks, we at the Central Bank of Kuwait (CBK) have concerns over recent developments in the world economy.”
“As we saw in 2008, the potential exists for these concerns to impact the global economy. The precarious situation with sovereign debt in some European economies, and most recently the possible impact on banking stability in Europe, are major concerns to us in Kuwait.”
“Combining the concerns in the USA as to high unemployment and huge debt creates instability in the two largest global economic areas in the world.”
“Either, especially Europe, could spark a new recession affecting all regions. This would include export dependent countries by lower levels of demand.”
“Of equal or greater concern is banking instability, especially in markets such as interbank markets, as happened three years ago.”

On banks
“As to the impact on our economy and banking system, while we believe Kuwait is most certainly not immune from global economic conditions, we believe our economy and banking system are presently sound.”
“We believe ... that we have made preparations, especially in the last 18 months, to help ensure the impact on Kuwait is minimized.”
“We believe, given the CBK’s extensive data gathering and financial analysis, that the Kuwaiti banking system is in quite good shape to withstand extraordinary global shocks.”
“By any standard, Kuwaiti banks are presently well capitalized including conservative leveraging ratios. Equally important, our supervisory reviews show our banks have more than ample liquidity.”
“Since the crisis, especially last year and year-to-date 2011, the CBK has put in place several preventative measures to enable us to monitor our banks using modernized methods. These allow us to take steps well in advance of either external or internal shocks to our banking sector.”
On economic imbalances
“The Kuwaiti economy needs to address the challenges posed by three main structural imbalances relating to the general budget, the labor market, and the role of the private sector.”
“These three structural imbalances are primarily a reflection of the dominant role of the government in the economy, and therefore addressing them requires a re-definition of that role through a comprehensive reform program.”
“The main aspect of that program relates to addressing the structural imbalance of the general budget by reducing gradually current expenditures, and enhancing non-oil revenues.”
“The efficiency gains achieved through this fiscal reform should create enabling environment for the private sector, both domestic and foreign, to enhance its role in local economy, and should enable it to create productive employment opportunities for the increasing national labor force.”
“The challenges are structural and require persistence. Therefore it is essential and urgent that significant reform steps are taken at this stage, because further postponement and delay will reduce the options available and further increase their cost.”
On interest rates
“We believe that the current interest rate settings are appropriate and accommodative with the prevailing economic and financial conditions both domestically and internationally.”
“Needless to say that we continue our monitoring of developments and stand ready to take necessary actions, if needed, to support our domestic economy.”