Fitch pegs surplus for FY 2017/18 at KD 900 mln

Boursa Kuwait performance mixed during the week Al-Shall Index

APublic Administration and

Populism

n amendment to the labor law in the private sector was published in the Official Gazette Kuwait Al-Youm Sunday, 06/05/2018 replacing the last paragraph of Article (51) of Law (6) of 2010 granting the Kuwaiti laborer in private sector full severance pay upon completion of service without deduction of the amounts incurred by the employer against subscription to the social security during his work period. This provision applies from the effective date of Law number (6) of 2010. Before dealing with the damages of that amendment, we stress our support for the necessity of involving the private sector in bearing the financial costs of the public finance similar to all civilized countries. This is achieved by adopting a tax bill in accordance with income brackets, says Al-Shall Economic Report prepared by Al-Shall Consulting Co headed by Jassem Al-Saadoun.

The said amendment contradicts declared objectives of economic and financial reform and their constitutionality is questionable. The more important and sublime development goal is creating indigenous job opportunities beyond the oversaturated public sector to an army of citizens coming shortly to the labor market. Hence, all development plans and reform projects highlight bridging the gap of the national labor market by encouraging citizens entering joining the private sector and bridging the production gap in economy by supporting the growth of the private sector to increase its contribution percentage from 38% in 2016 to 58% by 2021. To encourage the exodus of national labor to the private sector a law to support labor was enacted to reduce costs of a Kuwaiti worker in the private sector which the private sector cannot endure. The late amendment to the law will be applied but the private sector’s reaction will be negative when a future comparison will be made between employing the citizen and non-citizen. The result will be reduced job opportunities for the citizens in the private sector while the public sector is unable to accommodate new arrivals. Besides, the constitutionality of the amendment is doubtful as a result of its retroactive approval within 8 years during which financial positions of companies have been closed and some under the current circumstances are either impotent or are barely continuing. Adding the retroactive obligations is undeserved punishment sanctioned neither by logic nor by law and are valid only to buy political loyalty and help the return of harmful officials to their positions.

Not only that, the Legislative Committee of the National Assembly approved a draft amendment to another law to distinguish employees at the General Directorate of Investigations at the Ministry of Interior once they retire by giving them two years’ salary from their last monthly comprehensive salary and a pension equal to 80% of the last salary received plus other benefits. This is the same approach began in 2010 with cadres’ issues which ended by the current chaos which exhausted the Public Finance. The current proposal contains flagrant breach of the principle of justice and equality among employees. Its endorsement will open a similar door to other professions demands. With the early retirement project, the social security system will be destroyed similar to the Public Finance.

Kuwait unfortunately lives under a state of weak political stability. The public administration, both executive and legislative, is vulnerable to substitution, annually or less or more than that. Prospects of solving one of the two councils or both opens a major annual auction during which the State’s assets its stability and future are sold to pay for the return to chairs of the two powers. In the interval between major annual auctions, we witness many of the smaller or medium auctions with every questioning. We shall wait for the last three questionings or the price for the threat of others until the end of the current term.

Credit Rating – “Fitch” Agency

Fitch Agency for credit rating re-emphasized its former sovereign rating for Kuwait “AA” with a stable future outlook. In fact, it believes that Kuwait would achieve financial surplus for the FY 2017/2018 year by about KD 900 million, or the equivalent of

Photo shows traders at Boursa Kuwait. The bourse was largely positive during the week.

2.4% of GDP. This surplus would drop to about KD 300 million, or about 0.7% of GDP for the FY 2018/2019 and the same for the FY 2019/2020. Fitch states that is true despite the seriousness of continued major reliance of Kuwait on oil and despite the geopolitical events risks and despite weak governance and business environment in Kuwait.

The report is both good and valid; however, it is good and valid for those who wishes to deal with Kuwait, specifically for lenders. It is also good for Kuwait because its good rating helps reduce the cost of financing the State and its private sector when they seek financing from the global market. But it is invalid if it is viewed or understood as a certificate of sound Kuwaiti economy. The report implicitly does not negate that. Indeed, the report confirms that the Kuwaiti economy is good enough to cover all serious flaws to its economy such as its semi total addiction to oil, its weak governance, poor business environment and dominance of a costly governmental sector over its potentials. In economic terms, that means that its economic sustainability is skeptical. However, and according to the report, it is ok if its creditors and dealers continue their dealing. In short term, they can recover their dues under any scenario because of the volume of its aggregated savings in bountiful years.

But the report is invalid if it is read from a Kuwaiti economic perspective. It does not depend on the rules of Public Finance science in calculating surplus and deficit of public finance. Public Finance from its perspective is surplus if oil revenue and revenues of the financial reserve in its two parts. Future Generations Reserve is estimated at about US$ 490 billion and the general reserve is estimated at about US$ 90 billion. Both total US$ 580 billion. Investment income for the fiscal 2017/2018 is estimated at nearly KD 4.6 billion (US$ 15.7 billion) or about 3.27%, which is significantly lower than what is published. It added that income to oil revenues and other revenues and deducted the potential regular annual saving in expenditure and concluded that the budget would achieve about KD 900 million surplus for the FY 2017/2018. In the science of Public Finance, replacing in kind asset by selling it and converting it to a cash asset is not considered as public revenues. It counts only the income from an economic activity-taxes- plus investment income. That is the sustainable income. Everything else is used only in case of necessity as in the case of Norway. Addicting its usage is a scourge which would result in an advanced case of Dutch disease in the Kuwaiti economy. In all cases, it is an unsustainable financial situation.

In summary, the report is good for its audience, i.e. current and potential creditors to Kuwait. It is also good for Kuwait and its public and private sectors once they need to borrow from the international market. But it is wrong in its financial component because it conveys a false impression about the soundness of the economic situation. It doesn’t care about the safety of the economic situation because it is not within its audience interests.

Trading Features at Boursa Kuwait

– April 2018

Kuwait Clearing Company (KCC) issued its report about “Trading Volume According to Nationality and Category” for the period of 01/01/2018 to 30/04/2018 as published on the official website of Boursa Kuwait. The report indicated that individuals still form the largest trading category despite the drop in their share. They captured 41.9% of total value of purchased shares (52.9% for the first third of 2017) and 40.7% of total value of sold shares (53.2% for the first third of 2017). Individual dealers purchased shares in the amount of KD 422.640 million and sold shares worth KD 410.768 million with a net trading of purchasing at KD 11.872 million.

The second largest contributor to the market’s liquidity is the institutions and companies sector which captured 27.7% of total value of purchased shares (18.9% for the same period of 2017) and 25.2% of total value of sold shares (18.1% for the same period of 2017). This sector purchased shares worth KD 279.235 million and sold shares worth KD 253.755 million with a net trading value of most purchasing by KD 25.498 million.

The third contributor to market liquidity is the clients’ accounts (portfolios) sector which captured 20.2% of total value of purchased shares (21.4% for the same period of 2017) and 19.2% of total value of sold shares (22.2% for the same period of 2017). They purchased shares worth KD 204.254 million and sold shares worth KD 193.875 million, with a net trading value of purchasing, by KD 10.379 million.

The last contributor to liquidity is the investment funds sector which captured 14.9% of total value of sold shares (6.4% for the same period of 2017) and 10.2% of total value of purchased shares (6.8% for the same period of 2017). This sector sold shares worth KD 150.478 million and purchased shares worth KD 102.729 million, the only sector with net trading of selling, by KD 47.749 million.

Boursa Kuwait still continues to be a local boursa with more share for Kuwaiti traders being the biggest trading group. They sold shares worth KD 832.292 million, capturing 82.5% of total sold shares (90.5% for the same period of 2017), and purchased shares worth KD 817.912 million capturing 81.1% of total value of purchased shares (88.9% for the same period of 2017). Their net trading resulted in selling, by KD 14.380 million. This indicates a continued trend for the local investors to drop their investments in the domestic Boursa.

Percentage share of other investors out of the total purchased shares value, scored 14% (7.9% for the same period of 2017), and purchased shares worth KD 141.534 million and sold shares worth KD 103.819 million, 10.3% of total sold shares (6.5% for the same period of 2017); thus their net trading value, the only one purchasing by KD 37.714 million. This means that the foreigner’s confidence in the local Boursa is still high.

GCC Investors’ share out of total value of sold shares scored 7.2% (3% for the same period of 2017), worth KD 72.765 million, while value of purchased shares scored 4.9% (3.2% for the same period of 2017) worth KD 49.430 million, with net trading of most selling by KD 23.334 million.

The relative distribution among nationalities differed slightly from its predecessor. Kuwaitis occupied 81.8%, other nationalities occupied 12.2% and GCC traders’ share captured 6.1%, versus 89.7%, 7.2% and 3.1% for Kuwaitis, other nationalities and GCC traders respectively for the same period of 2017. This means Boursa Kuwait remained domestic with most shares to the local investor. The non-Kuwaiti investors from outside the GCC outweighed that from within the GCC states, with the dominance of trading for individuals.

Number of active accounts between the end of December 2017 and the end of April 2018 dropped by -19.6%, compared with an increase by 29.5% between the end of December 2016 and the end of April 2017. Number of active accounts in the end of April 2018 scored 14,321 or 3.7% of total accounts versus 15,090 accounts in the end of March 2018, 3.9% of total accounts for the same month, a drop by -5.1% during April 2018.

Gulf Bank Financial Results – First

Quarter 2018

Gulf Bank announced the results of its operations for the first quarter of the current year, which indicate that the bank’s net profits (after tax deduction) scored KD 10.8 million an increase by KD 1.45 million or by 15.5%, compared with KD 9.4 million for the same period in 2017.

This increase is due to the rise in total operating income by a higher value than the rise in total operating expenses. As a result, the bank’s operating profit (prior to the deduction of total provisions) rose by KD 2.75 million or by 9.2%, reaching KD 32.6 million compared with KD 29.9 million.

In further details, the bank’s total operating income increased by KD 3.8 million or by 8.6%, reaching KD 48.2 million compared with KD 44.4 million. This was achieved due to the rise in the item of net interest income by KD 6.8 million or by 22.7%, and scored KD 36.8 million versus KD 30 million. Meanwhile, the bank didn’t achieve any profit regarding the item of realized gains from disposal of investment securities, when compared with KD 2.6 million profit for the same period of last year.

On the other side, total operating expenses rose by KD 1.1 million or by 7.3%, and scored KD 15.6 million compared with KD 14.5 million in the same period of 2017, due to the rise in the items of staff costs, depreciation and other expenses by KD 1.1 million reaching KD 14.6 million versus KD 13.5 million. Percentage of total operating expenses to total operating income scored 32.3% versus 32.7%. Total provisions also increased by KD 1.2 million or by 6.1%, reaching KD 21.3 million versus KD 20.1 million. This explains the rise in the net profit margin to 22.4% compared with 21.1% in the same period of 2017.

The bank’s financial statements indicate that the bank’s total assets increased by KD 23.1 million or by 0.4% and scored KD 5.706 billion compared to KD 5.683 billion in the end of December of 2017, and increased by KD 120.4 million or by 2.2%, when compared with the same period of 2017, which scored KD 5.586 billion. Item of cash and cash equivalents rose by KD 82.8 million or by 17.4%, to KD 558.2 million (9.8% of total assets) versus KD 475.4 (8.4% of total assets) in the end of 2017. Meanwhile, it declined by KD 310.7 million or by 35.8% when compared with the same period of 2017, in which it scored KD 868.9 million (15.6% of total assets). Item of loans and advances to customers increased by KD 11.6 million or by 0.3% scoring KD 3.820 billion (66.9% of total assets) versus KD 3.809 billion (67% of total assets) in the end of 2017. It also increased by 12.8% or by KD 434.6 million, compared with KD 3.386 billion (60.6% of total assets) in the same period of 2017. Percentage of loans and advances to customers to total deposits scored 78.2% compared with 70% in the same period of 2017. Furthermore, item of treasury bills and bonds decreased by KD 29 million or by 5.1%, ending in KD 537.8 million (9.4% of total assets) versus KD 566.8 million (10% of total assets) in the end of December 2017, while it increased by KD 120.2 million or by 28.8% and scored KD 417.5 million (7.5% of total assets) compared with the same period of 2017. Also, item of deposits with banks and other financial institutions decreased by KD 24.3 million or by 62.1% and reached KD 14.8 million (0.3% of total assets) versus KD 39.1 million (0.7% of total assets) at the end of 2017, and decreased by KD 57.3 million or by 79.5% reaching KD 72 million (1.3% of total assets) when compared with the same period of 2017.

Figures indicate that the bank’s liabilities (excluding total equity) increased by KD 38.9 million or by 0.8%, and scored KD 5.121 billion versus KD 5.082 billion in the end of 2017. It rose by KD 99 million or by 2% compared with the total in the end of the first quarter of the previous year. Percentage of total liabilities to total assets scored 89.7% compared with 89.9%.

Result of analyzing financial statements calculated on annual basis indicates that all bank financial indexes showed an increase compared with the same period of 2017. The average return on assets (ROA) increased to 0.8% versus 0.7%. Likewise, the average return on capital (ROC) increased to 14.2% compared with 12.3%. Also, the average return equities relevant to the bank’s shareholders (ROE) increased to 7.3% compared with 6.6%. Earnings per share (EPS) scored 4 fils versus 3 fils. (P/E) scored 16 times versus 20.5 times (improved), as a result of the increased share market price by 4.1% compared with its price on the end of March 2017, with an increase in the (EPS) by 33.3%. (P/B) scored about 1.3 for both periods of this and the previous one.

The Weekly Performance of

Boursa Kuwait

The performance of Boursa Kuwait for last week was mixed compared to the previous one, where the traded value, traded volume and the number of transactions showed a decrease, while the general index showed an increase. AlShall Index (value weighted) closed at 392.6 points at the closing of last Thursday, showing an increase by 2.4 points or by 0.6% compared with its level last week, while it increased by 5.6 points or about 1.4% compared with the end of 2017.

The following tables summarize last week’s performance of Boursa Kuwait

Most Active Sectors & Companies