NBK publishes 2001 review

In their overview of the background and outlook for the Kuwaiti economy, NBK reckons that optimism about a sustained recovery in domestic economic activity last year was quickly overshadowed by the September 11 events in the US. Increased risks and uncertainties hanging over the global economy left their immediate footprints on oil prices that sank more than 40% within two months from their highs in September.

The key driver for next year's outlook is still by far the government's ability to execute its fiscal plans that continue to hold firm promise of strong growth in spending on development projects.

According to the NBK report, the outlook for the Kuwaiti economy was rather favorable before September 11. Oil revenues were strong as oil prices remained within the higher range targeted by OPEC. Government expenditures were rising slowly, though capital spending remained well below an ambitious budget.

Still, a host of new projects were being initiated promising a much-awaited increase in capital spending. Imports from Kuwait's major trading partners were rising at a healthy pace. Growth in the expatriate labor force during 2001 following a two-year decline signaled a pick up in private sector activity. Most importantly, momentum for economic reform was building.

Oil prices remained fairly strong during the first nine months of 2001, though slightly lower than their average for 2000. However, as the global economy appeared to fall into a synchronized slowdown during the fourth quarter, prices plummeted to lows not seen since June 1999. Consequently, the average KEC price for 2001 fell to $ 21.3 a barrel, down 25.7% from 2000.

The NBK report reveals that despite the drop in oil prices, the State's oil revenues still came above budget estimates in fiscal year (FY) 2000/2001 and the first nine months of 2001/2002. A combination of spending discipline, over-budgeting and slow implementation of approved projects kept expenditures well below budget estimates. As a result, FY 2000/2001 saw the largest budget surplus in over two decades, while FY 2001/2002 could end up in balance or slightly in surplus, versus an official projection of KD 1.44 billion in deficit.

Preliminary expenditure estimates indicate that current expenditures were up 16% during the first nine months of the FY 2001/2002 compared to the same period last FY. However, capital expenditures lagged 3% behind the previous year, which were also down 6% compared to the year before. This continued to hold back a meaningful rebound in real growth outside the oil sector.

Evidence of some acceleration in capital spending in the last 3 months and a sizeable increase in awarded projects in both 2000 and 2001 suggest a pick-up in capital spending in the coming year. NBK forecasts real non-oil GDP growth in 2001 at 2.0%, up from 1.4% in 2000, but still below the 2.2% registered in 1999.

The private sector probably saw its activities grow slower than those undertaken by the public sector during 2001. Indeed, this has been the case for the past two decades causing a steady drop in the private sector's contribution to GDP from 42% in 1982 to 26% in 2000 (49% of non-oil GDP). Concern over the dwindling role played by the private sector has been a major driver for the reform initiatives being put forward by the government.

During 2001, the government approved a foreign direct investment law (FDI) that removed the previous restriction on foreign investors from having majority ownership in a Kuwaiti company. This came a year after allowing portfolio investors to own and trade local equities.

The government also presented a draft law to the national assembly that proposes to lower taxes on foreign corporates to 25% from as high as 55% at present. The law could eventually include a provision to tax domestic companies at the same rate as foreign companies. These two initiatives are pre-requisites for the successful launch of a privatization program once the law is passed, probably in 2002.

The NBK report says that a law that aims to promote the employment of national labor by the private sector went into effect in May 2001. In June 2001, only 6.2% of employed nationals worked in the private sector. The law encourages Kuwaiti nationals to seek employment in the private sector by committing the government to pay them the same social and children allowances paid to public sector employees.

While it is too early to judge the success of the newly enacted law, published labor statistics for the first half of 2001 show a pick up in the growth of the national labor force working in the private sector. The expatriate labor force also increased over this period after having dropped in number for two consecutive years. This reversal in growth, and more specifically the rise in the number of semi-skilled workers in the private sector, suggests that activity was indeed picking up earlier in the year.

According to the NBK report, consumer spending should have benefited directly from the increase in the domestic labor force. Growth in spending was expected to recover to the 5.1% pace seen in 1999 after having dropped to 4.2% in 2000. In addition to the rising number of employed people, strong growth in consumer loans and in household formation provide additional indicators of a pick up in consumer demand.

The resumption of processing new loan applications and disbursements by the Savings and Credit Bank (SCB) after a six-month hiatus helped boost housing demand. The value of loans approved during the first ten months of 2001 was up 25% over a year ago.

The pick-up in loan approvals was reflected in the sale of residential property and the number of new building permits. The value of residential property sold during the second and third quarters of 2001 was up 22% over the previous two quarters. The number of building permits granted in 2001 was also up 20% over 2000. Residential construction benefited from this, as did other providers of consumer credit.

The rise in consumer spending caused imports to rise as well. Trade figures for the US, Japan, Germany, France and the UK, Kuwait's major trading partners, show combined imports were up 15% during the first seven months of the year. Much of the growth was in transportation equipment and cars, but imports of consumer and capital goods were also up. Combined with lower oil export revenues, the rise in imports should contribute to a lower current account surplus.

Other factors are also expected to weigh negatively on the current account surplus. The sharp drop in global interest rates, equity values and corporate earnings is expected to be reflected in investment income from abroad. Investment income has been a major contributor to the current account surplus in the past. It actually exceeded the merchandise trade surplus in four of the past six years.

NBK reports that transfers from the United Nations Compensation Commission (UNCC) to Kuwaiti individuals and institutions for losses suffered during the Iraqi invasion rose in 2001. More than KD 900 million was received from the UNCC contributing to the growth in foreign reserves of the Central Bank and liquidity in the banking system.

Both the KD exchange rate and inflation were stable during 2001. The KD appreciated against European currencies and the Japanese yen as these currencies depreciated against the US dollar. The KD continued to trade in a narrow band relative to the US dollar. Meanwhile, inflation remained subdued falling to 1.3% for the first 9 months of 2001.

The money supply, M2 increased by 13.1% during 2001. UNCC payments and a pick up in domestic loans were the main contributors to the increase in the money supply. Loans to non-bank financial institutions saw the biggest increase, followed by personal facilities and real estate loans. Overall, credit rose by 16.6%.

Even though the Debt Settlement Program came to a conclusion in 2000, the government continued to redeem part of the outstanding Debt Purchase Bonds (DPBs). Over the course of the year, KD 197 million in DPBs were amortized bringing their ratio to total assets down to 8.6%. Meanwhile, liquid assets consisting of claims on the government and Central Bank of Kuwait (CBK) rose to 23.9% of total assets by end December.

Following the trend in global markets, the CBK lowered its discount rate seven times during 2001 by a total of three percentage points. The last cut on October 30th dropped it to 4.25%. As a result, rates on loans and deposits also fell, though the average rate on deposits fell to a lesser degree due to intensified competition.

Despite the rise in the liquid assets ratio and a drop in domestic interest rates, local banks saw their profitability continue to grow stronger. Consolidated profits of the eight listed local banks were up 16.6% during the first nine months compared to the same period last year. A rise in interest income, fee income and lower provisions together contributed to the increase in profits.

The sector's return-on-equity and return-on-assets reached 21.0% and 2.2% on an annualized basis, respectively. NBK continued to enjoy the highest profitability ratios and net interest margin. The results for the year as a whole could be negatively impacted by the new 2.5% 'national labor' tax.

The NBK report says that locally listed firms also saw profits increase during the first nine months of the year. Consolidated profits of the 73 Kuwaiti companies reporting their earnings were up 23.2% relative to the same period a year earlier. UNCC payments were a contributing factor, as well as the rise in the local stock market where many listed firms hold significant investment portfolios.

The official Kuwait Stock Exchange (KSE) Index closed the year at 1709 up by over 27%. Activity also witnessed a marked increase with turnover value rising to KD 3,581 million, up 177% from a year ago.

The pick-up in activity was helped by the Kuwait Investment Authority's (KIA) sale of a 24% stake in the local Mobile Telecommunications Company (MTC) through a public subscription as well as participation in launching a number of local investment funds. KIA contributed KD 158 million worth of shares to 7 new funds set up in 2001 representing 46% of the funds' initial capital.