Money supply surges in Kuwait

Four months of relatively little change in M2 came to an abrupt end with strong growth in August and September. The main driver behind this growth was the increase in claims on the private sector.

NBK's report estimates that growth in domestic credit accelerated during the third quarter to 4.4%. Notwithstanding the strong impact of credit on money supply growth, other claims on the private sector provided an even larger boost this time around. Specifically, local investments held by banks increased by 42% during September alone from under 2% in the previous two quarters, contributing over KD 324 million to the increase in money.

Meanwhile, net foreign assets declined by 6.6% during 3Q02 on the back of a 7.6% decline in CBK's foreign assets and a 7% increase in foreign liabilities of local banks. This comes as the first quarterly drop in CBK foreign assets in three years where UNCC payments to Kuwait had caused a buildup in foreign assets of KD 2.09 billion (a 177% increase) between mid-1999 and mid-2002. UNCC payments in 3Q02 were KD 160 million.

The decline in CBK's net foreign assets appears to be a consequence of increased government spending during the most recent months as expansionary fiscal policy gains momentum in addition to a precautionary increase in government spending on imported food, medical and other emergency items in preparation for a possible military strike on Iraq. Indeed, government accounts at the CBK declined by 25% during 3Q02, while preliminary figures from the Ministry of Finance show an extraordinary 61% jump in government spending from the previous quarter.

According to the NBK report, increased government spending and UNCC payments helped boost local banks' liquid assets by 2.2% during 3Q02. Most of this increased liquidity was placed as time deposits at the central bank which rose by 5.6% during the quarter despite a 8.6% decline in September.

Meanwhile, banks' holdings of public debt instruments saw their largest quarterly increase since 2Q00, albeit growing by 1.4%, most of it taking place in September. Liquid assets of local banks consisting of cash, deposits at the CBK and holdings of public debt instruments reached KD 2.2 billion, representing 23% of total assets, down from 24% at end 2Q02. The drop in their share of total assets reflects the relatively higher growth in claims on the private sector and in other assets.

Following a flat quarter in 2Q02, private deposits resumed their growth in 3Q02 increasing by 4.2%. This growth took place in August and September with the latter seeing the largest rise in nine months, mostly in certificates of deposit (CDs). The increase came from a rise in KD deposits while foreign currency deposits declined by 4.7%.

Demand deposits witnessed a substantial drop in July falling by 8.2%, and had not recovered much since. This coincided with a similar increase in time deposits and suggests a shift into interest earning accounts as stock market activity began to cool off. Notably, CDs took in most of the rise in KD deposits during September increasing to KD 360 million from a mere KD 32 million. This increase in CDs accounts for 76% of the total increase in KD deposits during the entire quarter.

NBK's Economic Brief adds that interest rates continued to move lower during 3Q02 as the CBK's June cut in the discount rate made itself felt in the system. KD time deposit rates fell by 3-9 basis points (bps) for various maturities. The declines were smaller than those seen in June immediately following the cut. In September, treasury bills were issued at rates ranging from 4-22 bps below rates in June.