Kuwait credit growth averages 7% in 2016

Credit growth slowed further in December, despite a healthy gain during the month, on basis effects. Growth came in at 2.9 percent year-on-year (y/y), its slowest pace in nearly five years . December’s healthy net gain of KD 291 million in lending was dominated by a jump in lending for the purchase of securities and an unusually large increase in investment company debt. Lending for households and business activity was weaker in December. Total credit growth averaged 7 percent in 2016. Private deposits were down, though they were largely offset by an increase in government deposits. Interest rates were mixed on the month.

Credit growth’s recent slowdown is largely explained by a large corporate debt repayment in October, though basis effects were also to blame. A single borrower is thought to have repaid nearly KD 700 million. Still, we estimate that credit growth adjusted for this repayment still slowed to 5 percent y/y in December due to basis effects, as a result of large jump in lending in December 2015.

Household lending was weaker following two months of more robust gains. Growth eased to 6.5 percent y/y, well below the 12.6 percent y/y growth recorded at the end of 2015. December’s gains topped out at a modest KD 52 million, in line with the relatively weaker average recorded during the first nine months of 2016, though much smaller than the stronger gains recorded in October and November.

The weakness in household lending comes on the heels of a perceived slowdown in the consumer sector. Evidence has pointed to a decrease in household consumption. This has been visible in point-of-sale (POS) data, which shows consumer spending weakening notably in 2016. Growth in the value of local POS transactions slowed to 5.5 percent in 2016 from 13.3 percent in 2015.

Lending to nonbank financial companies saw a stronger than usual increase in December. Sector debt was up KD 85 million, as growth accelerated to 10.5 percent y/y. The sector, which ended 2016 with one of the most rapid paces of credit growth, was recording declines in debt just 12 months before and now appears to have clearly moved beyond more than six years of debt consolidation.

All remaining credit saw growth slow to 0.6 percent y/y on basis effects and the effects of the large debt repayment by a Kuwaiti company in October. The sector actually added KD 154 million in net new loans during the month, much of it in lending for the purchase of securities and the oil sector. These were partly offset by declines in real estate, industry and trade.

Private deposits were down KD 123 million in December, though mostly offset by a rise in government deposits. Broad M2 money supply growth fell to 3.1 percent y/y while growth in narrower M1 slowed to 2.1 percent y/y. The drop in deposits came largely from KD time and KD savings deposits, while KD sight deposits saw a small increase. Government deposits rose by KD 101 million during the month, offsetting much of the decline in private deposits, with growth steady at 14 percent y/y.

Banking system liquidity retreated for a second consecutive month but remained healthy nonetheless. Bank reserves (cash, deposits with the CBK and CBK bonds) lost KD 609 million to reach KD 4.7 billion or 7.75 percent of total bank assets. This coincided with a drop in foreign assets and the government continuing to tap bank liquidity through the issuance of domestic bonds. The issuance of domestic debt slowed slightly in December. Outstanding domestic public debt instruments (PDIs) rose by KD 100 million during December to KD 3.27 billion or an estimated 9.4 percent of GDP. This compares to a debt level of 4.6 percent in 2015. Meanwhile, outstanding CBK bills, used for liquidity management, decreased by KD 310 million in 2016, as the CBK reduced issuance of the 3-6 month paper to KD 8.4 billion in 2016 from KD 9.5 billion in 2015. Interest rates were mixed in December as interbank rates continued to edge lower on ample liquidity in Kuwait, while deposit rates rose following the policy rate hike. The 3month Kuwait interbank offered rate (Kibor) edged lower in December to 1.40 percent and has held relatively steady since. The rate was apparently unfazed by the CBK’s 25 basis point (bp) discount rate hike in December. Customer deposit rates, however, did benefit from the hike, rising by 8-10 bps in December.