Positive impact on Kuwait economy seen 

(MENAFN - Arab Times) In a surprise move towards boosting the non-oil sector and supporting domestic liquidity and economic activity, the Central Bank of Kuwait (CBK) cut its discount rate by another 50 basis point on February 7th, 2010. As a result CBK discount rate reached a low of 2.5%, which was last seen in 2003. This was the first cut entering 2010 and the seventh cut since January 2008. Thus, the CBK is seen to be continuing its ongoing loose monetary policy to go hand in hand with the expansionary fiscal policy.

As per CBK governor "the cut will provide the necessary environment conducive to boosting growth in non-oil sectors of national economy by reducing the cost of lending after indications that inflationary pressures have declined". In a related note, he added that "inflation in April dropped for the seventh straight month to 5.2% after registering a record average of 10.6% in 2008". In a related development, following the discount rate cut, the CBK cut its one week and one month repurchase rates by 25 basis points each to stand at 1.5% and 2.0% respectively.

The latest decision by CBK coincides with the approval of Kuwait Development Plan and Capital Market Authority law last week. The National Assembly passed the key Kuwait economic development plan up to 2013/14 that stipulates spending around KD30bn on mega development projects. Moreover, the Cabinet approved the allocation of KD4.78bn for capital expenditures in the first year of the plan (April 2010 to March 2011) while another KD2.5bn will be spent by the private sector to raise total capital spending in the first year to above KD7bn, as per Deputy Prime for Economic Affairs. Thus, we see a convergence in the fiscal and monetary policies, aiming at reviving the Kuwaiti economy and facing recessionary pressures.

Historically, it is important to note that the CBK followed a tight monetary policy since 2004 and up to the emergence of the financial crisis in 2008. At that time the main aim of the policy was to target inflation levels that reached historical double digit levels. However, by late 2008 the focus shifted to aim at economic growth and countering recessionary pressures and securing liquidity for the market due to the credit crunch. Thus, it is important to hail the prompt response of CBK that made use of all available tools to gear its monetary policy towards the benefits of the financial sector as well as the whole economy during the crisis.

Generally speaking, such decision will have a positive impact on the overall economy bearing in mind the actual application of the announced development plan. If that is the case, different economic sectors will benefit from the decision that will provide a sort of liquidity within the economy at lower costs. However, if the development plan is not implemented the CBK decision will not see the intended outcome materializing in terms of supporting overall economic activity.

Sectoral impact
Banking (Neutral to Negative)
We believe that the impact of the benchmark rate cut on the Kuwaiti banking sector will be from Neutral to Negative. Our stance is based of the following data from the Central Bank:
1- Over the last 1 year, deposit rates have decreased by 177bps to 2.48% in December 2009.
2- Over the last 1 year, lending rates have decreased by 93bps to 5.88% in December 2009.
3- Deposit and lending growth in 2009 has been 13.4%YoY and 6.1%, respectively. 4. 33% of the total loans are consumer loans.

Facts state that the deposit rates have fallen more sharply than the lending rates, leads us to believe that a further slide in deposit rates may not be on the cards. Deposit rates are already at the lowest levels in the last 8 years, since those seen in 2003 - 2004 when deposit rates dropped till 2.3%. The likelihood of a further drop, to the magnitude of 50bps, mimicking the change in the discount rate may therefore be deemed as very low.

On the other hand, lending yields have proven to be upward sticky and have not decreased in line with deposit rates. With an 8-year low of 5%, lending rates have the capacity to decrease further, from current levels, which may lead to shrinkage of spreads. This notion is further supported by the 3% cap (over discount rate) imposed by the Central Bank over consumer loans, which will surely translate into a 50bps decline in incremental consumer loans; to note, that 33% of total loans are consumer loans. Corporate loans which do not have any such restriction may still come under pressure given that the discount rate is widely used as the floating component in pricing local loans and that outstanding loans are re-priced periodically. In short, a decrease in the CBK rate may bring spreads under further pressure, directly and unfavourably impacting the net interest income of the banks.

Expected Scenarios
Fiscal Stimulus Implementation
Spreads No Yes
Decrease Negative Neutral Unchanged Negative Neutral/Positive
Increase Neutral/Positive Positive
Source: Global Research
Furthermore, we believe that a decline in the benchmark rates may not spur credit growth in isolation. Banks in Kuwait are already liquid apparent from lower loans/deposit ratio as compared to recent years. Stagnancy in growth is more due to supply side reluctance than from a dearth of borrowers. It should be noted that interest rates were already attractive before the latest rate cut. Thus, unless there is a stark shift in the attitudes of banks towards loans disbursement, such steps taken by the CBK may not bear fruit unless strongly supplemented by fiscal moves undertaken by the government.

Real Estate (Positive)
We believe real estate sector will benefit from such rate cut especially residential segment in case new credit lines are available at lower rates. The availability of liquidity for the sector will improve the CBK cuts discount rate Global Research - Kuwait 3 activity whether on the transaction or the construction levels. The decision will give another push to the sector especially after Kuwait Finance House (KFH) and similarly all Islamic banks were exempted from Laws 8 & 9 regulations that prevent banks and companies from dealing in residential real estate whether by trading or mortgaging.

Telecom (Neutral to Positive) Zain
Neutral Impact: as majority of its borrowings are international borrowings.

Wataniya Telecom
Positive Impact: ass of Sept. 30, 2009, about 47% of the company's borrowings are from local banks. Since finance cost on these loans are not disclosed, it is not possible to measure the exact impact.

Insurance (Positive)
Gulf Insurance Company (GIC): GIC has KD12.8mn as on 9M09 as bank overdraft, a cut in benchmark rate by CBK shall re-price the overdraft at a lower rate and bring down the interest cost for the company. This will have a positive impact on the earnings of the company going ahead.

Kuwait Insurance Company (KIC): KIC will not be impacted by the rate cut as the company does not hold any borrowings from banks.

Stock Market (Positive)
Theoretically stock markets are inversely related to interest rates. Any decrease in benchmark interest rates should therefore lead to a capital shift from fixed income securities to equities, given a risk trade-off. Moreover, a decrease in interest rate should make stock valuations more attractive, hence impacting stock market positively. Finally, the first trading session after the announcement showed that stock market seems to have reacted positively as "Global" general index reported 1.83% of daily growth by the end of Monday, February 8th 2010.

By Global Investment House