Kuwait will be the only member of the Gulf Cooperation Council to experience a slowdown in private-sector credit growth next year, according to HSBC Holdings Plc, as the implementation of a $111 billion investment program falters.
Real private-sector loans will increase 3.1 percent in 2012 compared with 4 percent this year, HSBC economists Simon Williams and Elizabeth Martins wrote in an Oct. 6 report. Lending growth will accelerate in Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Oman, the report said.
Kuwait’s government wants investors to meet almost half the cost of its four-year development plan aimed at modernizing the oil-based economy. Opposition lawmakers tried in May to question Prime Minister Sheikh Nasser Al-Mohammed Al-Sabah about the delays. The Constitutional Court has yet to rule on the request. Sheikh Nasser has been forced to form seven separate administrations and has survived three confidence votes since his appointment in 2006.
“We don’t expect to see a pick-up in credit growth until there’s a meaningful implementation of Kuwait’s development plan which co-opts the private sector,” Monica Malik, a Dubai-based economist at EFG-Hermes Holding SAE, the largest publicly traded Arab investment bank, said in a phone interview yesterday. Implementation of the non-hydrocarbon infrastructure projects “is vital for credit growth and a wider economic pick up,” Malik said.
Slowest Economic Growth
Economic growth in Kuwait has been the slowest in the GCC over the past five years, according to International Monetary Fund data. Gross domestic product expanded an average 2.6 percent a year, compared with 4.2 percent in the U.A.E., 5.7 percent in Bahrain and 18 percent in Qatar. Kuwait raised spending by 11 percent to 19.44 billion dinars ($70.4 billion) in the fiscal year that started in April to pay for higher salaries and the development plan.
“Government spending has accelerated from last year, including investment growth, but this hasn’t really led to greater implementation of the wider investment plan including private-sector involvement, which we see as being essential,” Malik said.
The average yield on bonds in the Persian Gulf region fell 24 basis points, or 0.24 percentage point, this year to 5.04 percent on Oct. 12, according to the HSBC/NASDAQ Dubai GCC Conventional US Dollar Bond Index. The yield on Kuwait Projects Co.’s 8.875 percent dollar bond due in October 2016 surged 94 basis points in the period to 8.05 percent.
Kuwait is seeking investors to help implement projects including investments that will increase oil and gas production, the construction of a metro and rail network, the expansion of the airport, new power stations, cities, hospitals, roads and a port on Boubyan Island.
The country plans to choose a strategic investor in its first Public Private Partnership project in the plan, Al-Zour North power station, by the end of this year.
A tender was issued for Al-Zour in March, more than a year after parliament approved the development program. Eleven companies and consortia, including Mitsui & Co., Marubeni Corp., General Electric Co. and GDF Suez, pre-qualified to bid for the combined generation power plant with a capacity of 1,500 megawatts and 100 million imperial gallons (120 million U.S. gallons) of water a day.
Private-sector credit growth can be gauged “from seeing how much is spent on the projects, almost none,” said Jassim al-Saadoun, head of Kuwait-based Al-Shall Economic Consultants.
The three-month interbank interest rate in Kuwait has been at 0.8125 percent for most of the past three months, about six basis points above the record-low hit on June 26, according to data compiled by Bloomberg. The rate is 0.66 percent in Saudi Arabia, 1.48625 percent in the U.A.E. and 1.183 percent in Bahrain.
Kuwait’s economy is struggling with “three imbalances” including an overly dominant public sector and a state budget dependent on oil revenue, the central bank Governor Sheikh Salem AbdulAziz Al-Sabah said in July.
“Without urgent and rapid capital spending on various state projects, there will not be good growth,” Sheikh Salem told CNBC Arabia in an interview. “Without providing good investment opportunities to the private sector to enable it to expand its local financial activities, the future outlook will be limited.”
Investment Company Defaults
Some of the country’s nearly 100 investment companies defaulted amid the credit crisis after the value of their assets collapsed and frozen debt markets prevented them from raising new loans. Global Investment House KSCC, Kuwait’s biggest investment bank that restructured $1.73 billion of debt in 2009, last month requested its creditors’ support to defer debt repayments due in December.
Investment Dar Co., the owner of half of Aston Martin Lagonda Ltd., has altered the terms on $5 billion of loans after defaulting in 2009. Finance company International Investment Group KSCC missed periodic payments on a $200 million Islamic bond in 2010, and Aayan Leasing & Investment Co. signed an agreement with nine creditors to reorganize $741 million of debt in May.
“Banks will hold back from giving loans, people are tense and won’t spend money,” al-Saadoun said. “Loan growth is almost zero, it’s been this way for two years. Sentiment is negative everywhere, especially in the Middle East, and the political situation here adds to that.”