Hike in oil prices irrelevant to reform process – 2015 ended with negative results for 3 main indexes of KSE

This news has been read 5332 times!

The  draft  budget  for  the  fiscal  year 2016/2017

The estimated deficit in the draft budget at about KD 12.2 billion equals 30% of the estimated GDP for 2016 in accordance with the Information Unit of the Economist (EIU); it also equals about 65% of estimated expenses. Half of such figures are unprecedented, unsustainable and represent   an   advanced   ailment  case.  A warning against a forthcoming recession cycle for the oil market was made more than 10 years ago. The oil market entered into a long concession period more than one and half years during which oil prices lost about 70% of their levels. Contrary to all public statements and promises, the Government increases all its public expenses if we exclude the mandatory reduction in the subsidy costs as a result of dropping oil prices.

On the other hand, oil production increased by 100,000 barrels per day during its cheap price. About 17% of production cost per barrel was reduced by reducing production cost from KD 2,483 million in FY 2014/2015 to KD 2,131 million in FY 2016/2017 despite increased production. If this is true, they mean that former costs are doubtful or perhaps imply corruption. Consequently, they increase revenues slightly which requires investigation because it is wrong and contradictory to reform efforts.

Yet what is more dangerous than that advance economic and financial sick case is the government’s belief that it fulfilled its commitment to comprehensive reform, economic and financial. The Minister of Finance said that the government adopted well planned and phased structural reforms and is proceeding with the structural reform. He added that these reforms began to appear clearly in 2016/2017 budget and that this reform led by the Ministry of Finance on behalf of the government will mitigate this deficit in the forthcoming years especially as international reports confirm that it is impossible for oil prices to remain between US$ 30-40 per barrel forever.

So as not to be lost in details, economic reform has unmistakable indicators such as proceeding with bridging the gaps of the four structural imbalances: public sector dominance, dominance of oil, or withdrawal from financial reserves — oil based — to finance public finance, demographic imbalance, and the imbalance in the workforce. The four imbalances increased deepened and led to deteriorating economic competitiveness and its weak opportunities to moving into a competitive economic and financial hub. Financial reform means continued reduction in public spending, while it is rising. More important still is the fundamental change in the bad structure of public expenses created by boom era of the oil market. If this does not change and the reliance on increasing construction spending by 13% is undoubtedly below the required figure for the appropriate capital formation. In terms of quality, it is not measured by the number of created national job opportunities and does not support the other development goals. It is no more than a forthcoming burden that widens the structural imbalances.

The government’s inability to adopt real reform policies is anticipated; our complete hope was to stop the direction opposing reform. But the government’s belief it did what it should do and more, it is going on with its economic and financial reform policies, and that the 2016/2017 draft budget is an indicator and title for the illusive reform efforts are the spots of danger. Not only that, it adds that the deficit is temporary and that all international reports agree that oil prices will increase. We concur with that but it is irrelevant to reform efforts. By so doing, the government provides politicians with the excuse to relax because even if the price of oil reaches US$ 100 per barrel, it is an unsustainable danger. This proves that the obstacle is in the belief that governs the decision making authority and not in the visions or resources.

 Oil and Public Finance – January 2016

By the end of January 2016, the tenth month of the current fiscal year 2015/2016 ended and oil prices continued their drop at a quicker pace than in September, October, November and December and broke the US$ 20 per barrel level downward. The lowest average price for Kuwaiti oil during January was at US$ 19.14 per barrel on January 20 and the highest was at US$ 28.65 per barrel on January 04, 2016. Average oil price for January 2016 scored US$ 23.3 per barrel, which is US$ -7.8 per barrel (-25.1%) less than the average of December 2015 which was at US$ 31.1 per barrel. It is also less by US$ -21.7 per barrel, -48.2% than the hypothetical price per barrel estimated for the current budget at US$ 45 per barrel. It is also lower by US$ -51.7 than the hypothetical price of the barrel for the past fiscal year which was at US$ 75 per barrel. It lost about -44.9% of its average price for January 2015 which was at US$ 42.3 per barrel. The past fiscal year 2014/2015 which ended by the end of last March scored US$ 81.3 per Kuwaiti oil barrel. This means the average price for January 2016 lost about -71.3% of the average price of the barrel of oil for the past fiscal year.

According to figures published in the monthly follow up report of the State’s financial accounts for December 2015 issued by the Ministry of Finance, Kuwait achieved actual oil revenues until the end of last December — 9 months — about KD 10.523 billion. Kuwait is supposed to have achieved about KD 0.9 billion in oil revenues in January. Therefore, anticipated oil revenues will increase during the 10 months to about KD 11.4 billion, 6% higher than the estimated oil revenues in the budget during the entire current fiscal year in the amount of KD 10.757 billion. Kuwait also achieved an amount of KD 858.2 million in non-oil revenues during the first nine months of the current fiscal year and will increase to KD 954 million in the 10 months’ period. Therefore, projected revenues will score KD 12.3 billion during the period.

Assuming that production and prices would continue at their present levels  — an assumption which may not be realized — it is expected that value of potential oil revenues for the entire current fiscal year would score about KD 13.3 billion, which is about KD 2.5 billion higher than the oil revenues estimated for the budget. Adding some KD 1.4 billion in non-oil revenues, total budget revenues for the current fiscal year would score KD 14.7 billion. If that is realized and assuming that all budget expenditure estimates in the amount of KD 19.2 billion is spent and without deducting what is transferred to the future generations reserves because it is meaningless in case of a deficit financed by the general reserve or by borrowing guaranteed by the future generations reserve, actual deficit would score KD 4.5 billion. However, this deficit figure might be more or less subject to the developments in oil prices in the next two months remaining from the current fiscal year. The deficit will be less by any reduction of the estimated budget expenses when actual expenses are reviewed in the final account. Under all circumstances, the current fiscal year will realize the first deficit in 16 fiscal years.

Kuwait Stock Exchange Performance – January 2016

The year 2015 ended with a negative result for the three main indexes which achieved heavy losses due to the continued sharp drop in oil prices (below US$ 30 per barrel in the last quarter of 2015) as well as the threats of geopolitical situation in the region and using the oil as the main weapon for it. This all reflected negatively for January. The market continued its sharp regression during January 2016. The price index dropped to 5,114.5 points (5,615.1 points in the end of last year), a decline by -8.9%. The weighted index scored 353.4 points (381.7 points in the end of last year), with a drop by -7.4%. Kuwait 15 Index dropped about -7.8% compared with its level in the end of last year. When we compare the performance of the three indexes (Price, weighted, and Kuwait 15) with their performance in January  2015,  they  remained  losers  by (-22.2%, -20%, and -22.6%) respectively.

AlShall index reading at the end of Sunday 31/01/2016 scored 334.6 points, a drop by 31.3 points, or by -8.5%, compare with its closure in the end of last year at 365.9 points. It dropped by -24.8% vis-à-vis January 2015. The highest reading during the  month  was  at  362.4 points scored on  04/01/2016 and the lowest was at 306.1 points on 21/01/2016.

Traded value of shares during (20 working days) scored about KD 282 million rising by KD 40.3 million, or by 16.7% compared with KD 241.7 million in the end of December 2015. It however drops by -43.8% if compared with the end of January 2015.  The highest trading value in one day during the month scored KD 27.7 million on 17/01/2016 and the lowest was recorded on 06/01/2016 about KD 6.7 million. The daily average value of traded shares was KD 14.1 million (KD 11 million in December 2015), up by 28.3%. The banking sector led other sectors in liquidity and captured KD 120.8 million, 42.8% of the total of market liquidity. The real estate sector came second by 15.4%, financial services sector came next by about 15.3% when compared with the end of December 2015. Total volume of traded shares scored 2.697 billion shares rising by 15.3% if compared with 2.340 billion shares in the end of December 2015. Total number of transactions 64.7 thousand deals with a daily average scored 3,233 deals up by 19.9% compared with the end of December 2015.

Market value of all listed companies — 190 companies — scored KD 24.3 billion declining   by   KD  1.902  billion,  or  by  -7.3%, as reflected by the weighted index versus KD 26.2 billion in the end of 2015. It is worth mentioning that the number of gaining companies was 24 out of 190 common companies and 141 companies recorded varying losses in their values. And value of 25 companies remained unchanged. After excluding the companies whose capitals are increased — two companies — or reduced, “GFH Financial Group” recorded the highest rise in value by an increase of 22.4%. “Al-Mowasat Health Care Co” came next by 16.7% rise. On the other hand, “Tiba Kuwaiti Holding Co” achieved the highest loss in its value by -76.7%. “Munshaat Real Estate Projects Co” came next and lost -41.4% of its value. 11 sectors out of 12 sectors dropped in value including basic materials sector which dropped by -12.4% and the oil and gas   sector   came   second  in  losses  by  -11.6%, while the health care sector scored the only rise by 1.3%. February performance will be linked by two factors and the companies do not have the ability to influence them, and their impact will be greater than the profit and dividend announcements, those two factors are the developments in the oil market and the hottest or break through geopolitical events, thus, it’s likely that extreme inequality is a performance feature for the month of February, and a few months to come followed.

Comparative Performance for Selected Stock Markets – January 2016

A very negative situation prevailed over the sample markets in January. The 14 markets’ performance was negative at varying degrees. The negative performance of the mature and emerging markets as well as the GCC markets was all mixed. The   lowest   loss   was  at  -2.4%  and  the  highest was at -22.6%. 10 markets achieved medium losses which ranged between -4.2% and -9.1%.

The biggest loser which dragged all other markets behind it was the Chinese market whose   index   lost  in  one  month  about  -22.6% of its value. The transfer of infection was the fear of the transfer of the disease to the real economy of the biggest global trade partners. The Chinese stock exchange was subject to a major correct movement in June 2015 which incited authorities to provide unprecedented support to it. It seemed that its measures yielded positive outcome until the end of last year. It however returned to failure in January similar to all support experiences in the world throughout four centuries.

The second major loser in January was the Saudi market which lost -13.2%. This seems logical due to the severe deterioration in oil prices and the continued regional wars on more than one front. The Qatari market shared the two major losers in losses for the same Saudi market’s   justifications  and   lost   about   -9.1%. The Kuwaiti market weighted index was not far away in it losses which scored -7.4% though they were less than the Japanese and German’s losses. The least market in losses was the Bahraini which lost -2.4% only with the British market being close at -2.5%.

It seems what is happening to China and its impact on the demand side on oil deepened in January the losses of the oil market which is passing through a price war among traditional producers. The drop of oil prices below the US$ 30 limit per barrel is a negative factor even to the performance of consuming economies. It is also an element that foretells instability to some oil producing countries. IMF warning about a potential weakness in the global economic growth in this year perhaps sums up those conditions although we believe that correction to the markets may be due after an era of inflation in stocks prices due to the abundance of cheap funds in the era of quantitative facilitation.

Performance of most of those markets may be positive in February due to the substantial losses in January which are usually followed by some compensation and secondly due to the impact of some statements of a likely reduction in the surplus of oil supplies on prices. Nevertheless, there is a likelihood that the opposite might occur because an agreement on limiting the surplus in supplies is a political decision which is extremely unpredictable.

The Weekly Performance of Kuwait Stock Exchange

The performance of Kuwait Stock Exchange (KSE) for last week was more active compared to the previous one, where all indexes showed an increase, the traded value index, the traded volume index, the number of transactions index, and the general index also showed an increase, AlShall Index (value weighted) closed at 338.7 points at the closing of last Thursday, showing an increase of about 14.3 points or about 4.4% compared with its level last week, while it decreased by 27.2 points or about 7.4% compared with the end of 2015.

The following tables summarize last week’s performance of KSE

Description                               Week 5                   Week 4           Diff

                                       04/02/2016              28/01/2016             %

Working days                      5                 5         

AlShall index (38 Companies)       338.7              324.4       4.4%

KSE index                     5,198.4            5,010.4       3.8%

Value Trade (KD)            81,920,938         63,257,907

Daily average (KD)          16,384,188         12,651,581      29.5%

Volume Trade (Shares)       919,913,867        832,920,723

Daily average (Shares)      183,982,773        166,584,145      10.4%

Transactions                   22,741             18,924

Daily average (Transactions)       4,548              3,785      20.2%

 Most Active Sectors & Companies

                                   Value Traded          % of Total

Kuwait Finance House                   14,580,474             17.8%

Mobile Telecomms Co K.S.C (Zain)           8,031,315              9.8%

National Bank Of Kuwait                   6,594,149              8.0%

Warba Bank                            6,240,717              7.6%

Agility Public Warehousing Company         4,446,849              5.4%

Total                                 39,893,504             48.7%

Description                         Value Traded          % Of Total

Sectors                                    KD            Market

Banks Sector                          36,015,353             44.0%

Financial Services Sector                 12,347,917             15.1%

Real Estate Sector                      10,580,854             12.9%

Telecommunications Sector                9,565,957             11.7%

Industrials Sector                        8,720,887             10.6%

Al Shall Index                                            Week 5                   Week 4

                                                       04/02/2016              28/01/2016

Increased Value (# of Companies)                 27                25

Decreased Value (# of Companies)                 4                 2

Unchanged Value (# of Companies)                7                11

Total Companies                              38                38

This news has been read 5332 times!