DUBAI, June 15, (RTRS): The decision by Kuwait’s central bank not to hike interest rates this week, in contrast to other Gulf states, was due to the rapid improvement of liquidity in its banking system as well as concern about economic growth, analysts said.
After the US Federal Reserve raised rates by 25 basis points on Wednesday, the central banks of Saudi Arabia, the United Arab Emirates, Qatar and Bahrain all followed suit. Oman had already been raising its official rate gradually in line with market rates.
But Kuwait took a different tack, keeping its discount rate flat at 2.75 percent even though it had followed the Fed after the three previous US rate hikes since December 2015.
In a statement, the Kuwaiti central bank cited factors including low oil prices and its objective of supporting sustainable economic growth, saying it would use other tools and procedures, which it did not specify, to support the dinar currency.
The fact that Kuwait manages the dinar against a US dollar-denominated basket of currencies, rather than pegging it to the dollar as the other Gulf states do, gives it a little more flexibility to choose its own monetary policy.
It chose to exercise this flexibility because of sluggish growth, analysts said. The International Monetary Fund predicts the Kuwait economy will shrink 0.2 percent this year — partly because of a global deal among oil producers to cut output — after 2.5 percent growth last year.
“There’s an economic slowdown, and having raised the benchmark discount rate by 75 basis points since December 2015, they can afford not to raise it now,” said Dima Jardaneh, head of regional economic research at Standard Chartered.
In addition, an increase in banking sector liquidity over the past few months has reduced the need for Kuwait to maintain high interest rates to attract funds.
The spread of the three-month Kuwait interbank offered rate over the US dollar London interbank offered rate has shrunk to 38 bps from 69 bps at the start of this year.
“Domestic liquidity … is doing very well, so the central bank is in no hurry to lift the rates,” said Nemr Kanafani, senior economist at the National Bank of Kuwait, the country’s biggest listed lender.
A leap in Kuwait’s trade surplus due to a rebound in oil prices has helped to push more petrodollars into the banking system. The surplus more than quadrupled from a year earlier to 1.63 billion dinars ($5.4 billion) in the first quarter of 2017.
The World Bank said on Thursday that 2016 economic growth in Kuwait climbed at a “modest” pace to three percent due to higher oil production and the implementation of major infrastructure projects.
Speaking at its main office in Kuwait in a joint televised press conference from Washington and Riyadh, the bank’s Chief GCC Economist Tehmina Khan said that non oil estimates for Kuwait remain “strong.”
Kuwait’s economic outlook remains “relatively resilient” due to substantial oil buffers and government reform plans, she added, commenting on a new World Bank report which also projects “modest” growth in the six GCC states over the next six months.
Sustaining this would depend on the Kuwaiti government’s ability to implement its six-point reform plan, she said.
The expert also hailed the government’s awareness on increasing the private sector’s role, which she said would be key in sustaining these reforms.
For his part, Country Director for the GCC Countries Nadir Mohammed said that Kuwait is one of the lowest countries in the region in regards to public debt and would be one of the quickest to return to surpluses.
In its report, the World Bank’s outlook until December showed Kuwait as the third least country with general government gross debt (just under 20 percent of GDP) behind the UAE and Saudi Arabia.
The report also projected that growth in GCC states, as a whole, would “gradually recover” from 1.3 percent in 2017 to 2.6 percent in 2019.
Regarding the non oil sector, the report expected a gradual recovery due to the slowing pace of fiscal austerity and major reform plans.
“The green shoots of recovery are cropping up, helped by the recovery in global energy prices over the past year,” said Mohammed.
“That’s good for public finances across the region,” he said, adding this provides space for governments to focus on long term challenges.
Hailing reform plans currently being assumed by the six countries, he added that GCC states should alter their focus on short term spending cuts towards “deeper, multi-dimensional fiscal policy and institutional reforms,” such as value-added tax.
However, he noted to several risks, namely regional geopolitical developments, turbulence in global markets and the production of shale oil in North America.