Boursa Kuwait performance during week less active Danger of borrowing lies in oil’s weakness
Al-Shall Report
Risks of Financing Deficit by
Borrowing
‘Carmen Rinehart,’ Global Financial System Professor at Harvard University, and the Associate Author of “This Time Is Different” which documents 8 decades of crises, published an article in Project Syndicate on March 30, 2017 under the title “How to Face the Oil Shock” We are not going to show or outline the article although it is proper in warning from the treatment of dual deficit, i.e. deficit of the current account and the budget deficit by borrowing particularly by the US dollar. She concluded her article by “Leaders of deficit oil states should not interpret the request for financing their loans as a vote of confidence in their policies or their economies,” says Al-Shall Economic Report prepared by Al-Shall Consulting Co headed by Jassem Al-Saadoun.
The core of the article was oil prices losing about 60% of their level between 2011 and 2016. With this, most oil states changed from double surplus in the current account and in the budget to a dual deficit. Because these states have become unable to reduce their public expenses close to the level in their revenues, they resorted to finance the deficit by borrowing. “Merrilll Lynch American Bank”: expects that the shares of KSA, Kuwait, Qatar and Argentina out of total global loans in 2017 will represent 37% with substantial turnout simply because there is abundance in liquidity in surplus in the global financial system at a time interest rates are too low.
The risk, according to Rinehart, lies in the wrong estimate of the term of the oil market’s weakness. If it proves to be long-term, those states will suffer from a genuine crisis that would lead to their credit classification deterioration. As they borrow by the dollar and most of them link their currencies with the US dollar exchange rate, pressures may press their currencies downward or even reduction which wills double the burden of their debts in the future. It provided two influencing factors which would make the continued oil market weakness continue. The first is a record rise for the drilling platforms to produce the rock shale oil in the USA since September 2015 to make up for the lost production of traditional oil. The second is the probable disintegration of the oil production reduction agreement among traditional oil producers.
In our estimate, the best expectations in the foreseeable future reassert that oil prices will remain losing 60% of the highest level achieved. The danger of borrowing or liquidating reserves lies in the continued oil market weakness. Therefore, borrowing, or liquidation, regardless of its success, is a dangerous transfer for a sustained deficit crisis whose costs will be double and probable unacceptable in the future.
Business Environment in Kuwait
The Doing Business Report issued by the World Bank for 2017 concurs in its classification with other reports in deteriorated business environment about widespread corruption and lack of transparency, and the continued low competitive economy. These reports are neutral and are irrelevant to politics. In its counting the number of procedures and the number of days required to begin a business, Kuwait is the last position among Arab states. Out of 19 Arab states covered by the report, Kuwait occupied rank 19 because establishing a new business needs 61 days and 12 procedures. As for the level of doing business environment, governed by 10 indexes, Kuwait regressed to position 102 in 2017 out of 190 states covered by the report back from position 98 in 2016. This is contradicting with the objectives of all the subsequent development plans. In the GCC region, Kuwait came last in the general environment of doing business while the UAE came first (24 position in the world) with 8 positions better than 2016 when it occupied position 34. Bahrain came second with rank 63 among the world (66 in 2016) and Oman came third and came in the 66 position (69 in 2016). Qatar regressed from 74 position to 83 in 2017. KSA advanced to position 94 (96 in 2016).
In the 10 indexes which govern Kuwait’s classification, 6 of them surpassed its classification in position 102 (Its ranks came higher than 102). The worst was starting business procedures which ranked 173; then trading across borders came in position 157; then building licensing which came in position 144; obtaining finance came 118; and then obtaining electricity in position 115. All of these are directly linked to the two declared development goals since the beginning of the current millennium: improving the completion position of Kuwait to excel in its services as a financial and trade center.
What we are concerned with in the foregoing is that Kuwait uses wrong criteria in judging the development plan’s achievements. Sometimes it states percentages and it is not important whether these percentages are 50% or 70%, or any figure, in fact is lagging in development by time. Therefore, it is natural for such a country to be unable to run or operate an aviation company. What is happening to Kuwait Airways Company is happening to the majority of the State’s institutions (about 60). We should have a reform pause so that we would not discover crises in all these institutions later on. What causes great concern is that the continued regression in all indicators is the rule which no longer causes any anger, sorrow, jealousy, or even shame of officials. Kuwait which was the good example now looks for rare exceptions and minor successes to exaggerate celebrations.
Kuwait Airways Corporation
(KAC)
Before last week, the term of the Board of Directors of “KAC” was not renewed to be the second Board of Directors that changes in four and half years. A third board of directors began a new era. It is now certain that the country will enter into an era of investigation and political hostility. And perhaps legal issues similar to the Boursa, “CMA”, Anti-Corruption Authority and two national assemblies and awaiting for the third judgment on the current national assembly and many others. We are neither with nor against anyone regarding its events. Neither are we in the side of investigators and we do not possess the information about what is happening in it. But the probability remains that the third board of directors will face the same destiny.
On October 25, 2015 we mentioned in our report that “KAC” operation model failed by experience and will fail in future. We received an urgent and conclusive response from a senior official there objecting our opinion. It was a polite and honest call and invitation to our report team to visit the company to listen to its developmental project which aims at restoring some lost sovereignty in the sky. We responded that we do not cast any doubts on the management’s ability and integrity. However, the option of a successful company’s business is confined in two directions; the first is that it requires to be part of a state project that wishes to transform into a travel station that links East with West with parallel projects for commercial tourism and infrastructure and superior aviation services. The second is the operation pattern of private aviation companies whose main drive is augmenting profitability which requires a different financial engineering in terms of volume, destinations, costs, and the capital ratio to loans similar to other commercial aviation companies.
We mentioned then that the political management project for an aviation company was tried and it failed. The management option will be either to respond to the politicians’ pressures and the influencers and maybe the corrupters in recruiting and benefiting from services or resisting pressures with all the consequences like sowing crises in its course and pushing it to resign or dismissal. In the end we did not agree with the company’s opinion and we did not succeeded to convince them but out of respect to their enthusiasm we opted not to write about the company since that date. It is insignificant now to state who was right but it is obvious that the operation model did not, and will not, succeed.
We want to say as a conclusion that what is happening is not relevant to a board of directors or a minister. The country hardly exits a crisis until another one is born. Certainly, there is large vacuum that creates the modest ability of the public administration. Its remedy is not by spreading hostilities and consuming the remaining human capabilities in crisis making projects made competently by the absence of the competence of the public administration. The remedy is inevitably by confronting the source but not the symptoms of these crises, i.e. surgical treatment of the country’s public administration.
Profits of Listed Companies
2016
173 companies out of 178 listed companies (about 97%) announced results of their operations for the year ended December 31, 2016. Their net profits scored KD 1.696 billion, with a rise by 1% over the profits of same companies in 2015 which were KD 1.680 billion. Maintaining the same profitability level in a weak performing year with reduced liquidity and assets prices makes what has been achieved quite well though a sorting has been realized: the good companies improved their performance at the account of other companies with different performance level.
Gainers were 94 including 81 companies of which increased their profits and 13 companies reduced their losses or become profitable. In other words, 54% of the companies which announced their results achieved progress in their performance and it is the same number for the same sample of 2015. Numbers of losers were 79 companies for the two years, in 2016, including 19 that moved from profit to loss and 60 companies decreased their profits. The top 10 winning companies achieved the highest profit value worth KD 1.129 billion, 66.6%, of total absolute profits led by “NBK” by about KD 295.2 million. “Ahli United Bank-Bahrain” came second by KD 172.7 million, and “KFH” came third in profits by KD 165.2 million. On the contrary, the top 10 companies in losses scored KD 163.3 million in absolute losses. “National Industries Group” achieved the highest losses KD 24.2 million, and “The Sultan Center Food Products Co” came second in losses by about KD 24.1 million.
7 sectors out of 12 active sectors increased their profits compared with their performance in the end of 2015. The Banking Sector took the lead and increased its profits from KD 858.8 million to KD 930.3 million, increased by KD 71.4 million. The most regressing sector was the Real Estate Sector whose profits dropped from KD 165.2 million to KD 78.4 million, i.e. decreased by KD 86.8 million.
94 companies announced intentions to distribute profits: 70 companies announced distributing cash dividends only, 9 companies announced share dividends only and 15 companies announced mixed distributions of cash dividends and shares dividends. 79 companies announced will not distribute anything.
Total profitability indices remained at their levels. Return on assets (ROA) settled at 1.4% compared with 2015. While the average return on equity (ROE) decreased slightly from 6.3% in 2015 to 6.2% in 2016. P/E scored 15.5 times in the end of 2016 (15.4 times).
This means we might perceive improvement in profitability levels from the first quarter of 2017 due to the major improvement in the Boursa liquidity. But continued improvements in the remaining part of the year 2017 is uncertain and is conditioned by continued high liquidity of the Boursa and improved distribution of liquidity among listed companies, i.e. improved deviation towards harmful speculation.
The Weekly Performance of Boursa Kuwait
The performance of Boursa Kuwait for last week was less active compared to the previous one, where all indexes showed a decrease, the traded value index, the traded volume index, number of transactions index, and the general index. Al Shall Index (value weighted) closed at 394.2 points at the closing of last Thursday, showing a decrease of about 4.8 points or about 1.2% compared with its level last week, while it increased by 31.2 points or about 8.6% compared with the end of 2016.
The following tables summarize last week’s performance of Boursa Kuwait