Actual oil revenues until Jan 31 reach KD 13.066b
Performance of Boursa Kuwait for last week was mixed where traded value increased
An International Monetary Fund’s report stated a few weeks ago that the Gulf countries may lose their savings by 2034 with some before that date and others after. Last week S&P Agency estimated that Gulf banks might lose two degrees of their long-term credit rating because a percentage of their loans is linked to the oil and gas sector, both of which seem to be gradually losing their importance. None of the reports brought anything new; in fact, they are late in their conclusions as warnings preceded them more than two decades ago. The government even has had an old similar report since July 1987, another report by Mackenzie, reports of the government track committees in the 1990s, “Tony Blair’s Report” in the first decade of the current millennium, then Mackenzie’s report for the Northern Economic Region (Kuwait), and many other warnings to the same effect, says Al-Shall Economic Report prepared by Al-Shall Consulting Co headed by Jassem Al-Saadoun.
The two recent reports above warn against the Gulf countries’ continued dependence on oil and gas at a time when the environmental and technical progress fears are on their way to weaken the importance of fossil energy sources, which means weaker demand and lower prices, while public expenditures are financed mainly by their sale revenues. IMF report, out of specialization, is more comprehensive and focuses on repeated warnings, i.e. the financial structural imbalance, or the inability to diversify public finance financing sources away from oil, which the Gulf States suffered from at varying degrees in the 1980s and 1990s. S&P’s report, albeit using the same approach, is only concerned with a part of its specialty, or the classification of banks subject to its classification. It links their likely weak rating in the future with the degree of their loans’ linkage with the energy sector. Although the Agency differentiates between one country and another in terms of their involvement percentage in financing the energy sector. The report estimates that the banking sector’s involvement in both Saudi Arabia and Qatar is directly related to the sector’s financing obligations by about 15% of their portfolios. In Kuwait and the UAE, the involvement is up to 10%. It, however, returns to comprehensiveness when it links the difficulties faced by all banking sectors with the indirect impact, i.e. the indirect influence of all other borrowers by the scarcity of oil and gas revenues together with the government’s role overall its other financings, whether they are real estate, retail or private institutions.
The importance of these two reports is not in their conclusions but in two other dimensions. The first dimension is that they, contrary to their previous reports which cover the short to medium terms and conclude the solvency of the financial position of most of their countries.
This time they directly warn of the dangers of the economic future. We have repeatedly warned against the error of reading their financial reports’ conclusions. The other dimension is that they are reports rather than causing panic and the inability to act properly, but state that there is still time. We should take advantage of the warning and stop consuming the too little time remaining in the debate about whether taking necessary action or not, or act promptly to have real development. Just as a reminder, Kuwait has two completely contradictory projects one of which is consistent with the concerns of the two reports but the other is an incomplete contradiction and calls for more involvement with oil at about US$ 450 billion cost to increase production capacity to 4 million barrels/day, Kuwait should decide its course.
Oil Prices and Public Expenditures
To complete the previous two warnings by IMF and S&P’s
Agency about the depletion of the ‘financial reserves” of the Gulf countries and the potential for downgrading their banks’ credit ratings, it is necessary to review some history of the correlation of public expenditures and oil prices.
In the absence of serious thinking about the future of the State of Kuwait, the history of that relationship narrates how the inflexible and harmful public expenditures get loose whenever the oil prices which finance about 90% of them and they continue to rise even when oil prices fall. In the Fiscal Year 2002/2003 the average price of Kuwaiti oil barrel scored US$ 25.8, and public expenditures according to the final account for the same fiscal year was at KD 4.93 billion. In the FY 2018/2019, the average Kuwaiti oil barrel scored US$ 68.5, and public expenditures according to the closing account amounted to about KD 21.85 billion.
These figures mean that oil prices between FY 2002/2003 and FY 2018/2019 rose by nearly 2.7 times while public expenditures increased between the two fiscal years by 4.4 times. That risky approach is more evident when we compare the movement of oil prices with the movement of public expenditures between FY 2011/2012 and FY 2018/2019. In the 2011/2012 fiscal year, the price of Kuwaiti oil barrel was about US$ 109.9 and actual public expenditures scored about KD 17 billion.
In the fiscal year 2018-2019, the price of a Kuwaiti oil barrel, as we mentioned, was at US$ 68.5, and the actual public expenditures for the same fiscal year amounted to KD 21.85 billion. This means that the price of Kuwaiti oil barrel between the two previously mentioned fiscal years lost about 37.7% of its level while public expenditures for the same period rose by about 29%. Back to the conclusion of the two stated reports above which say that oil prices in the medium to long term will decline.
It suffices to indicate that they decreased by 37.7% in 8 years, during which all financial reform policies failed. With an estimated deficit of KD 6.7 billion for the current fiscal year 2019/2020, and forwarding the accumulation of deficits to the future with the inevitability of rising non-feasible public expenditures and decrease in oil prices with high production costs and perhaps a reduction in production to support prices, the results cannot be but as mentioned in the two reports. Lately, after assuming it was a warning message to the two reports about the future of the fiscal deficit and after the general reserve liquidity’s depletion, a sabotage campaign to the balance of the Public Institution of Social Security began with the approval of populist laws that affect it in their first deliberations so that the forthcoming danger will not be confined to the young generations joining the labor market but will affect the retiree’s safety. The government is completely unable to protect the future of both groups.
Monthly Report of the State Financial Administration Accounts – January 2020
In its monthly follow-up report for the State’s Financial Administration until the end of January 2020 (as published on its website), the Ministry of Finance indicates that total realized revenues until the end of the 10th month of the current Fiscal Year 2019/2020 scored KD 14.293 billion, which is 90.4% of the total estimated revenues for the entire fiscal year in the amount of about KD 15.812 billion. In details, actual oil revenues until 31/01/2020 were at KD 13.066 billion, i.e. 94.2% of the estimated oil revenues for the entire current fiscal year in the amount of KD 13.863 billion, or about 91.4% of total collected revenues. The average Kuwaiti oil price for the first ten months of the current fiscal year 2019/2020 scored US$ 64.8 per barrel. An amount of KD 1.228 billion was collected from non-oil revenues during the same period with a monthly average of KD 122.758 million, while the total estimated amount for the entire current fiscal year was about KD 1.948 billion.
This means that the realized amount if it continues at the monthly average, will be less for the entire current fiscal year by nearly KD 475 million than the estimated. Expenditures allocations for the current fiscal year were estimated at approximately KD 22.5 billion, of which an amount of KD 12.837 billion has been actually spent according to the bulletin until 31/01/2020. An amount of KD 2.290 billion has been obligated and considered as spent, raising the total expenditures – the actual and the obligated – to KD 15.127 billion.
The monthly average of the actual expenditures and the obligated is nearly KD 1.513 billion. Though the bulletin concludes that the budget achieved at the end of the 10th month of the current fiscal year a KD 833.326 million deficit before deducting the 10% of total revenues to the favor of the Future Generations Reserve, we publish it without recommending relying on it and taking into account that the monthly spending average will increase significantly by the end of the fiscal year.
The surplus or the deficit figure by the end of the fiscal year relies mainly on oil prices and production volume in the remaining 2 months of the fiscal year, and the deficit may rise further if the actual expenditures increase more than the estimated allocation expenditures and that was a precedent that occurred in the previous fiscal year.
Ahli United Bank (Al Mutahed) Financial Results 2019
AUB announced results of its operations for the year ending in December 31st 2019, which indicate that the bank achieved profits (after deducting taxes) by KD 55 million, a rise by KD 3.8 million or by 7.3% versus KD 51.2 million in 2018. This rise is attributed to the decrease in total provisions by a greater value than the decrease in the operating profit.
The following graph displays the profits level attributed to the bank’s shareholders during the period 2008-2019. In details, the bank’s total operating income decreased by KD 14.4 million or by 11.8%, reaching KD 107.2 million compared with KD 121.6 million. This resulted from the drop in item of net financing income by KD 15.3 million, to reach KD 85.1 million compared with KD 100.4 million. While item of net gain from investment securities rose by KD 2.3 million, to KD 6.8 million versus KD 4.5 million in 2018. On the other hand, the bank’s total operating expenses rose by KD 2.8 million or by 7.4%, reaching KD 40 million versus KD 37.2 million in the end of 2018. As a result of the increase in item of depreciation by KD 2.5 million. Percentage of total operating expenses to total operating income scored 37.3% compared with 30.6% in 2018. Total provisions decreased by KD 21.1 million or by 69.1%, reaching KD 9.4 million versus KD 30.5 million. Accordingly, the net profit margin for the bank shareholders rose to 51.3% compared with 42.2% in the end of 2018. Total bank assets scored KD 4.351 billion, increasing by KD 437.8 million or by 11.2%, versus KD 3.914 billion in the end of 2018.
Item of financing receivables increased by KD 218.8 million, reaching KD 3.019 billion (69.4% of total assets) versus KD 2.800 billion (71.5% of total assets) in the end of 2018. Percentage of financing receivables to total depositors scored 80.6% compared with 83.8%. Moreover, item of deposits with other banks rose by KD 119.6 million and scored KD 454.4 million (10.4% of total assets), versus KD 334.8 million (8.6% of total assets). Figures indicate that the bank’s liabilities (excluding total equity) increased by KD 413 million or by 12.1%, and scored KD 3.835 billion compared with KD 3.422 billion in the end of 2018. Percentage of total liabilities to total assets scored 88.1% versus 87.4% in 2018.
Results of analyzing the bank’s financial statements indicate that profitability ratios showed mixed performances compared with the end of 2018. Return on assets (ROA) declined slightly to 1.33% versus 1.35%. While return on capital (ROC) rose to 27.3% compared with 26.7% in 2018. Return on equities (ROE) increased to 12.4% versus 12.2% in 2018. Likewise, earnings per share (EPS) rose to 27.8 Fils versus 25.8 Fils in 2018. (P/E) scored 12.3 times compared with 11.5 times in 2018, due to the rise in EPS by 7.8% against a greater rise in the share market price by 15.2%. (P/B) scored 1.4 times compared with 1.2 times in the end of 2018.
The bank announced that it would distribute cash dividends by 15% of the nominal share value, i.e. 15 Fils per share, and distribute 5% as bonus shares. This means the share achieved cash yield by 4.4% on the closing price in the end of December 2019 in the amount of 342 Fils. In 2018, cash distributions were 15% and bonus shares were at 5% which means that the bank obtained the same level of distributions.
The Weekly Performance of Boursa Kuwait
The performance of Boursa Kuwait for last week was mixed where the traded value increased, while the traded volume, number of transactions and the general index (Al Shall Index) decreased. Al Shall Index (value weighted) closed at 538.4 points as of last Thursday, showing a decrease by 1.5 points or by 0.3% compared with its level last week. Also, it decreased by 14.8 points or by 2.7% compared with the end of 2019.