Money supply growth slows in Kuwait

In its latest economic brief on monetary developments, National Bank of Kuwait reports money supply (M2) growth slowed substantially during 2Q02 falling to 0.2% following 5.1% growth in the prior quarter.

Still, year-on-year growth remained high at 13.7%, recording the largest 12-month increase in a decade. Growth during the first half of the year was moderate at 5.2%.

UNCC payments have been a key factor behind the record growth in money supply over the past two years. Payments amounted to KD 237 million during 2Q02, however, the sale by the Kuwait Investment Authority (KIA) of 43% of the shares of Bank of Kuwait and the Middle East (BKME) represented a large drain on money growth. The public subscription closed on June 18 and was worth KD 93 million. Investors relied to a large extent on bank credit to make their purchase of BKME shares.

Another factor that may have contributed to lack of growth in the money supply is the delay in the approval of the state budget for fiscal year 2002/2003, that started in April 2002 but was only approved in July. The delay has likely caused a halt in spending on planned programs and projects which may partly explain the growth in government deposits at the central bank. Government spending is a major factor influencing the domestic supply of money as Kuwait typically experiences major liquidity leakages abroad in the form of spending on imported goods and services and on travel and investments.

NBK states that credit growth in June was the most rapid since November 2001 following two months of small declines in credit to the private sector. This increase did not make itself felt in increased growth in money supply as a result of KIA's sale of a large stake in BKME shares which took money out of the system offsetting the expansionary impact of credit growth. As a whole, 2Q02 saw credit growth steady at 1.7% with year-on-year growth at 15.7%. The bulk of the growth in credit was in personal facilities up by 8.2% in 2Q02. Lending to non-bank financial institutions, meanwhile, saw a 13.3% decline in outstanding loans during the quarter though year-on-year growth remained relatively high at 53%.

According to NBK's report, private deposits saw their slowest quarterly growth in a year with deposits standing still. This did not change the fact that private KD deposits grew at a rapid rate year-on-year. The most rapid growth was visible in demand deposits which reached 34% during the last 12 months. Even as total deposits were unchanged during June, demand deposits managed to grow by a rapid 7.2%, mostly at the expense of time deposits.

Meanwhile, time deposit growth over the last 12 months has grown by 11.3%, though such deposits were on decline over the last four months resulting in a 3.4% drop during 1H02. The move to more liquid deposits partly reflects the low opportunity cost of holding non-interest earning deposits, and partly the increase in demand for transaction balances to finance the higher trading volume on the local stock exchange.

Bank assets grew by 2.5% in 2Q02 slightly under the 3.4% seen in 1Q02, largely due to a decline in June. Major changes in June were reflected in a KD 376 million reduction in bank time deposits at the CBK, a 20% drop, with only a part of this decline made up for by an increase in bank foreign assets.

NBK's Economic Brief noted that net foreign assets of local banks had recovered slightly in June after having reached a record low in the previous month caused by steady growth in deposits of foreign banks. It also noted that the decline in bank assets during June coincided with KIA's sale of BKME shares and the start of the summer season when expatriates, going on home leave, make larger transfers abroad than usual.

Debt Purchase Bond (DPB) redemptions during 2Q02 were a mere KD 11 million, well below the KD 93 million redeemed during the first quarter of the year. Total DPB redemptions during last 12 months reached KD 223 million, compared to KD 310 million the prior year. As a percent of bank assets, DPBs dropped to 7.5% from 8.6% at the end of 2001 and 10% a year ago.

NBK reports that the Central Bank of Kuwait cut the discount rate in early June by 50 basis points (bps) to 3.75%. The CBK justified the move by its desire to reduce the wide spread between KD and US dollar rates, considering that it left rates intact when the US Federal Reserve cut rates twice late last year.

KD time deposit rates fell by between 39 and 52 bps depending on maturity, their largest declines since November 2001. Treasury bills were also issued at lower rates, with 3-month bill rates down by 46 bps and 6-month rates falling by 50 bps.