The most important economic events in 2016

AL SHALL WEEKLY REPORT

The Economist Information Unit amended its estimates of the historical performance of the local economy from minus -1.6% and -2.1% for 2014 and 2015 respectively to 0.5% and 1.8% for 2014 and 2015. It expects the GDP to continue its positive real growth by about 2.3% for 2016 but will weaken to score 1.6% for 2017; then it regains some strength to grow by about 2.6% in 2018. But under all circumstances it will remain weak growth and incapable of creating enough jobs opportunities. And it expects nominal GDP to fall to about KD 32 billion in 2016 from the record level of KD 49.4 billion in 2013, then it will rise to KD 37.9 billion in 2017 and then to KD 41 billion in 2018.

The average price of Kuwaiti oil in 2016 scored US$ 38.9 per barrel down from an average of about US$ 48 in 2015, losing about 18.9%. But the discrepancy in the barrel price was about 115.1% positive between its lowest average price at US$ 23.3 per barrel in January 2016 and US$ 50 average price for December of the same year. The year started with a very weak average price level and ended with a high level, which is good. OPEC and some producers outside it agreed to withdraw 1.8 million barrels a day from the market: -1.2 million barrels a day for OPEC and 600 thousand barrels for nonOPEC producers.

After they have been exhausted by production surplus wars. The response was short term, i.e. the rise in price by more than 20% while OPEC production losses were at 3.6% and 4.9% for Kuwait. And if the last oil agreement holds, macroeconomic performance indicators will be better -the economic growth level and conditions of external and internal balances- and vice versa, Therefore, we should be careful when we read the predictions of future performance of the domestic economy; the margin of likely error will remain significant.

Fiscal reform measures

Expenditures allocations for fiscal year 2016/2017 -April 2016 to March 2017-scored about KD 18.892 billion, a slight drop by about 2.2% from the previous fiscal year appropriations, despite the impact of lower oil prices on reducing fuel and energy support expenses on the State budget. Financial reform project seemed among the least influential items in terms of bridging the financial gap -diesel and electricity, water and gasoline- and the most vulnerable to objection and debate. On the contrary, defense expenses and costs of treatment abroad were untethered at multiples of the impact of fiscal reform measures.

Even those actions, and after bargaining, private housing for citizens was exempted from electricity and water charges; citizens were granted 75 liters of gasoline per month. In other words, the Government lacked the exemplary role and its priorities were reversed; the reaction of the street came directly in the results of parliamentary election on November 26, 2016 which punished the 2013 National Assembly and the Government. Nevertheless, seemingly, they didn’t work and the same Government returned. It is almost impossible to adopt any real or essential financial or economic reform policies. With a potential and prolonged weakness of the oil market, with the maximum potential price at US$ 60 per barrel, which is lower than the parity price for any future budget, and with the Government’s orientation to resort to domestic and global borrowing markets, in addition to liquidating assets within its financial reserves, it is now certain that the financial and economic situations will not be sustainable, but the implications of the lack of sustainability are risky to the stability and not the development country in the future.

After the US Federal Reserve Bank lifted the dollar interest by a quarter point in December 2015 and another quarter point in December 2016, The Central Bank of Kuwait has raised the discount rate to 2.25% after the first rise, and then to 2.5% after the second. This means starting a contracting monetary policy. This happens despite the difference in the position in the U.S. economic cycle from the cycle of the Kuwaiti economy. The former is witnessing the beginning of recovery that drove it to anticipate the hot economy and hedge against inflation. The latter is perching in its weak performance position and needs an expansionist monetary policy. However, the Central Bank of Kuwait’s decision is correct because its targets lie in repatriating the Kuwaiti dinar, with the risks of failure to repatriate being much higher than the risks of weak economic growth. Perhaps 2017 may carry more pressures and lifting interest rates on the US dollar are likely to be repeated, together with the Kuwaiti dinar. This opens the door for more contracting monetary policies.

Weak growth rates

With weak domestic economic growth rates and the beginning of a contracting monetary policy, coupled with an apparent inability of the public administration to adopt and apply genuine financial and economic reform policies, with the expansion of geopolitical violence in the region, all of which led to decline in confidence and caused pressures on liquidity and prices of main assets in Kuwait. After the stock exchange lost about 35.2% of its liquidity and Al Shall index lost about 17.6% of its value in 2015, the stock exchange lost about 27.5% of its liquidity and Al Shall index lost about 0.8% of its value in 2016. As a result value of individuals’ wealth continued to decline in the local market as well as banks’ mortgages of stock values. The real estate market was no better; after it lost 33.5% of its liquidity in 2015, it lost approximately 28% of its liquidity in 2016 December figures are estimates- and most market components -private, investment and residential- lost a margin of their prices. But due to the absence of price indices of these components we cannot give figures.

In summary, 2016 events were not positive in terms of their impact on the local economy. The oil market continued weak; geopolitical violence continued to escalate; and the local public administration continued its inability to reduce the level of consequences, and it is unexpected to start a construction phase. Performance of the global economy is still weak and the states which drive demand on oil like China and Asian Tigers lost a margin higher than their historical growth rates, and technological developments of producing non-traditional oil and development of preserving the environment contributed to continued weak economic growth in the long term. Only one positive shift occurred during the year, ie OPEC agreement and oil producing countries from non-OPEC members to control production which provided Kuwait and States which heavily rely on oil export a space of time, albeit short, to work hard on repairing their conditions; but the return of almost the same core Government dissipated a lot of hope for reform.

2. Oil and Public Finance - December 2016

By the end of December 2016, the 9th month of the current fiscal year 2016/2017 ended and by the end of last summer and the talk about an agreement on the oil market prices began to rise. The Kuwaiti oil price during October scored US$ 46.5 per barrel, and achieved the highest price during the year at US$ 51.91 per barrel on December 12, 2016. The lowest price during the month was at US$ 47.68 per barrel on December 1, 2016.

The average Kuwaiti oil price for most of December scored US$ 50 per barrel rising by US$ 8.5 per barrel, or 20.6% above November average which scored US$ 41.5 per barrel. It is also higher by US$ 15 per barrel, 43%, than the hypothetical budget price at US$ 35 per barrel and is higher by US$ 5 than the hypothetical budget price for last fiscal year at US$ 45 per barrel. December 2015 price scored US$ 31.1 per barrel and the past fiscal year 2015/2016 which ended by the end of March 2016 achieved average price for the Kuwaiti barrel of oil at US$ 42.7. This means that the average price for December 2016 rose by 17.1% above last fiscal year and rose by 60.9% above December 2015 average.

The State’s Financial Administration did not issue any monthly follow up report since December 2015. As estimate, Kuwait is supposed to have achieved actual net oil revenues in December in the amount of KD 1.1 billion. Therefore, Kuwait would have achieved about KD 9.3 billion in oil revenues until the end of last December. If we assume prices and production would remain as they are now -unrealistic assumption- oil revenues would score about KD 12.6 billion, 146% of estimated oil revenues in the budget for the entire current fiscal year which is in the amount of KD 8.6 billion. Adding an amount of KD 1.6 billion in non-oil revenues, projected budget revenues would score KD 14.2 billion for the current fiscal year.

3. Boursa Kuwait Liquidity Features 2016

By the end of 2016, Kuwait Boursa added to its liquidity during December -trading value- an amount of KD 321.5 million, or by 12.1% to the amount accumulated in the past eleven months of 2016, bringing the total liquidity in 2016 to about KD 2.873 billion. Total liquidity of 2016 dropped by -27.5% compared with 2015 liquidity. In fact, the Boursa liquidity measured by value of daily trading, scored its peak in 2007 and since then the Boursa liquidity has been weak and scored lowest level in 2016 2.113 billion of total market liquidity, representing about 66.3% of its total capital value. Number of speculation companies within the sample was 13 which captured 15.9% of total market trading value, i.e. KD 457.9 million, while their market value equaled 2.2% only of total value of Boursa companies compared with 12 speculation companies in 2015, which captured 1.9% of total market trading value and 17.7% of market liquidity.

The average turnover of the share may provide us with a different perspective to look at that speculation sharpness. The index measures the percentage of the company trading value divided by its market value. While the turnover average of shares for all market companies continued weak for all market companies at about 10.9%, and the Boursa needs twice this number at least to be liquid, and weak within the 30 top liquidity companies with the highest liquidity at about 11.9%, it scored about 79% for the 13 companies. The highest company scored 833.1%, 567.4% for the second highest company, and 289.4% for the third highest. Despite their high rise they remain less than the turnover average of this sample (30 company) of the companies in 2015 which scored 16.2%.

4. Performance of Boursa Kuwait 2016

Boursa performance was affected by a number of changes during 2016, some positive variables, though its impact does not appear yet and most of it negative variables that left its impact during the year. As for the positive side, the Boursa turned into a private company in the spring of the year, though it did not finalize its measures and its performance supposed to improve by time. By the end of the year, conditions of the oil market improved and in the last two months in the year, the Boursa witnessed increase in its liquidity and decrease in the losses of its main indexes, which might positively extend to its performance in 2017.

As for the negative side, the Kuwaiti oil barrel average price lost about -18.9% of its level in 2016 compared to 2015. Events of geopolitical violence escalated and the Central Bank of Kuwait began in December a contractual policy by raising the interest rate by 0.25% point with the possibility of repeating more than once in 2017. It was the result of the performance of main indexes of the Boursa, compared with its performance in 2015, Kuwait 15 Index lost about -1.7% and scored 885 points versus 900.4 points, the weighted index lost -0.4% and scored 380.1 points versus 381.7 points, while the price index gained 2.4% and scored 5,748.1 points versus 5,615.1 points. This is a shameful index and does not reflect the reality of the change. The important negative development, was the losses of liquidity of the Boursa in 2016, scored about 27.5% from the level of liquidity in 2015, that was also scarce. The daily average value of the Boursa trading in 2016, scored about KD 11.6 million versus KD 15.9 million in 2015. Half of the listed companies (including 7 withdrawn companies from the Boursa in 2016) got 2.8% only from that scarce liquidity. Even the relatively liquid companies the distribution of liquidity among them was unfair. 13 companies whose market value equaled 2.2% only of Boursa’s value, or by 15.9% of Boursa’s liquidity. Scarce liquidity and its sharp deviation denote investors’ weak confidence in the Boursa. Market capitalization in the end of the year, for 184 listed companies, after the withdrawal of the “Future Communications Co. Global” during December 2016, scored KD 26.2 billion. When we compare their value in the end of 2015 for 183 companies (without including the “Safat Global Holding Co.” which was re-listed in November 2016), we note they rose by KD 137.9 million, or by 0.5%. The number of gainers whose value increased was 70 companies out of 183 companies; 106 companies recorded varying drops in their values, while value of 7 companies did not change. The Industry sector achieved the highest gain by KD 412.9 million, then the Telecommunications sector rise by KD 290.2 million, due to the rise in “Zain” value.

While the banking sector dropped by KD 779.7 million. As for listed companies, “GFH Financial Group” achieved the highest rise in its market capitalization value by KD 293.4 million, compared with its value at the beginning of the year, then “Zain” by KD 258.5 million rise, then “KFH” by KD 257.3 million. On the other hand, “NBK” achieved a decline in its value by KD 368.6 million, then “Burgan Bank” by KD 163.9 million, and then “Al Ahli United Bank” by about KD 124.4 million. The banking sector is still dominating in its contributions to the Boursa market capitalization value by 47.2% (half of which belongs to two banks, “NBK” and “KFH”). While the second largest contributing, the Telecommunications sector by 10.9% of the Boursa value. Although the two sectors obtained 58.1% of the Boursa market capitalization value, their share from its liquidity, i.e. trading value, scored 44.6% while the financial sector contribution by 9.6% of its share from the Boursa market capitalization value scored 19.8%. If we accept profitability in the first nine months of 2016, as index for the profits of the entire year, we not a drop in profitability by -3%, by scoring KD 1.328 billion versus KD 1.369 billion for the same period in 2015. The number of gaining companies which are common in the two periods was 136 companies out of 176 companies, which declared their financial statements. Gainers achieved KD 1.394 billion, deducted about KD 65.8 million, which represent 40 companies scored losses. The banking sector contributed 51.9% of Boursa profits, then the telecommunications sector by 14%, while the 8 sectors contributed out of 12 sectors active in supporting these profitability and 4 sectors achieved absolute losses. As for companies, “NBK” was the leader in profits by KD 219.3 million, then the “Al Ahli United Bahraini Bank” by KD 133.5 million. While “Al-Mal Investment Co.” achieved the highest losses by KD 14.1 million and “National Industries Group (Holding)” by KD 5.1 million losses.

When analyzing the financial performance indicators for listed companies, according to the profit levels until end of September 30, calculated on an annual basis, compared with the end of 2015, according to the schedule, we note that the price multiplier index market profitability (P/E) retreated -improved- to about 14.6 times compared with 15.4 times. The price index to book value (P/B) retreated to 0.9 times compared with 1 times, while the return on equity (ROE) increased to 6.5%, compared with 6.3%, and return on total assets (ROA) increased slightly, to about 1.43% compared with 1.39%.

5. The Weekly Performance of Boursa Kuwait

The performance of Boursa Kuwait for last week was more active compared to the previous one, where all indexes showed an increase, the traded value index, the traded volume index, number of transactions index, and general index, AlShall Index (value weighted) closed at 363 points at the closing of last Thursday, showing an increase of about 2.6 points or about 0.7% compared with its level last week, while it decreased by 2.9 points or about 0.8% compared with the end of 2015.