Public expenditures increasing constantly

Oil revenues for entire fiscal year would score KD 17.5 bln

Oil and Public Finance July 2019

By the end of July 2019, the 4th month of the current fiscal year 2019/2020 ended and the average price for Kuwaiti oil for July scored US$ 64.9 per barrel, higher by US$ 9.9 per barrel or 18% than the new hypothetical price estimated in the current budget at US$ 55 per barrel. It is also higher by US$ 14.9 than the average hypothetical price for the past fiscal year in the amount of US$ 50 per barrel. The average oil price for the Kuwaiti oil during the past fiscal year 2018/2019 scored US$ 68.5 per barrel. The average price for July is lower by 5.3% than the average price for the past fiscal year and lower by US$ 15.1 per barrel than the budget’s parity price at US$ 80 per barrel, according to the Ministry of Finance after deducting 10% to the future generations’ reserve, says Al-Shall Economic Report prepared by Al-Shall Consulting Co headed by Jassem Al-Saadoun.

Kuwait is supposed to have achieved actual oil revenues in July of about KD 1.4 billion. Assuming that production and prices would continue at the current levels – an unrealistic assumption – Kuwait’s oil revenues for the entire fiscal year would score about KD 17.5 billion, after deducting production cost for the entire year. This is KD 3 billion higher than the estimated for the current budget in the amount of KD 14.5 billion. Adding KD 1.9 billion in non-oil revenues, total budget revenues for the current fiscal year would score KD 19.4 billion.

Comparing this figure with the expenditures allocations in the amount of KD 22.5 billion, it would be likely that the public budget would score a deficit by KD 3.1 billion. However, four months are only good enough to be used as an indicator to the hypothetical deficit of the budget. The actual deficit will be a variable subject to the movement of oil prices and production levels during the remaining part of the year.

Final Account Fiscal Year 2018/2019

On July 28, 2019 the Minister of Finance presented a press release reviewing gross figures for the final account of the fiscal year 2018/2019. Figures unfortunately suggest continued correlation between revenues, most of which are uncontrollable by us, and public expenditures which has continued for 5 years as the title of reform policies without any reform. The briefing states that total realized revenues scored KD 20.558 billion, 89.6% of which are oil revenues up from KD 16 billion in the past fiscal year, i.e. an increase by 28.5%. The actual expenditures scored KD 21.849 billion, up from KD 19.247 billion in the past fiscal year and an increase of 13.5%, i.e. relative increase by 3 times the actual expenditure estimated in the previous budget. The actual expenses increase from the final account between the fiscal year 2016/2017 and 2017/2018 was 8.7%.

In details, public expenditures is increasing constantly, while expectations are almost unanimous on decline in public revenues for the current fiscal year and in the future due to pressures to lower production and oil prices. The quality of public spending is deteriorating. Public spending which exceeded budget estimates at the beginning of its approval – before any additional allocations – by about KD 349 million – which is a precedence with the share of current expenditures increasing from 83.2% in the previous fiscal year to 86.1%. The share of capital expenditures has declined in absolute terms. Salaries item, similar items and subsidies rose to an unprecedented level of KD 16.334 billion or about 88.6% of total actual oil revenues in a good year for the oil market and 79.5% of total public revenues. While the absolute increase in non-oil revenues could be considered at KD 2.130 billion from KD 1.717 billion in the fiscal year 2017/2018, about 68.3% of which are under other revenues, i.e. undefined, due either to their dispersion, i.e. have no main source, or due to their weak classification, which is an accounting flaw. The decline in the account of trusts or their balance by 29.5% is a good thing, but their level after the reduction is still around KD 4.23 billion, which is a big figure and is equivalent to about 19.4% of the total inflated budget. Trusts are a problem created from nothing due to the uncontrolled fiscal policy and its accounting system.

The actual deficit estimate doesn’t relate to reality. The budget deficit amounted to KD 3.346 billion after deducting the transferred amount to the reserve of the future generations, which is meaningless. What is transferred for the future generations reserve is deducted from the general reserve and drops to KD 1.291 billion before the deduction, which is correct from an accounting point of view, while deficit scientifically is much higher as long as the funding source of expenditure is unsustainable revenues.

The conclusion of the final account analysis is conclusive that the announced financial and economic reform policies are irrelevant to reality. Even what is classified as investment spending is not considered as investment spending, as long as it is not related to creating national and sustainable employment opportunities.

Financial Stability Report 2018

The Financial Stability Office at the Central Bank of Kuwait (CBK) released the Financial Stability Report for the year ending Dec 31, 2018, which is the seventh of its kind. It reviews indicators and details that mean progress in both quality and transparency, the Central Bank of Kuwait and the concerned department are to be thanked. We will present very briefly some of the information and indicators reviewed by the report which confirms the soundness of the local banking sector conditions during the period covered by the report as there is still some growth in its business and risks are still few.

The report confirms that banks’ assets in 2018 achieved 4.3% growth rate compared with a 6% growth rate in 2017. Although the number of traditional and Islamic banks is equal, or five banks each, traditional banks have remained more dominant in having assets as they captured 59.5% of total assets while Islamic banks captured 39.6%. Loans portfolio, the main banks’ activity, achieved a growth rate by 4.9% compared to 3.9% in 2017. Personal loans recorded a growth rate of 7.8% and took 60.4% of total assets. The slow growth in total assets may be accompanied by a reduction in its value in anticipation of risks. A decline in the defaulting loans for the ninth consecutive year coincided with the growth of the loan portfolio to unprecedented levels of 1.6% only in 2018, which is lower than the percentage prior to the global financial crisis at 3.8% in 2007. It scored about 11.5% in the post-crisis in 2009. Despite its record decline, the defaulting loans coverage percentage was at 254% (230% in 2017). Prior to the global financial crisis in 2007 it was 87%. The traditional banks’ share of total irregular loans is about 56.5%, almost in proportion to their share of total loans of 56.8%.

This remarkable improvement could not have happened without instructions to write off some of them and to deduct additional allocations that seemed unnecessary then at times of prosperity but they were preventive prudent policies. The above is supported by the solid banking sector conditions. The capital adequacy ratio stood at 18.3% in 2018, which is higher than the 13% required by the Central Bank of Kuwait. The financial leverage level for the sector reached 10.3% while the requirements of the Basel Committee were 3%. This provides a significant margin for the banking sector to expand lending.

The growth rate of deposits with Kuwaiti banks declined to 2.4% in 2018 compared with a remarkable growth of about 7% in 2017. At the end of 2018, it scored KD 55.2 billion, including the ownerships of deposits of branches or banks owned by local banks abroad, while domestic deposits accounted for 79.2% or KD 43.7 billion, of which 66% were deposits for a term, which is a high percentage and represents a stabilizing factor for the banks’ lending activity. This has strengthened the status of liquidity assets at the banks which scored about KD 24 billion. Basic liquidity percentage scored 75.5% there from.

Kuwaiti banks’ profits continued to rise and their growth scored 18% in 2018 compared with 9% in 2017, thus achieving the highest level of profits for Kuwaiti banks since the global financial crisis. The consolidated net profit rose to about KD 959 million. The profitability of banks has been assisted by the expansion of the fiscal policy, the increase in interest and non-interest revenues and the decreasing need to take allocations for loans. Despite the equal number of conventional and Islamic banks, the report notes that the conventional segment is still superior by contributing 60.4% and 59.5% of the banking sector’s profits and assets, respectively.

Performance of Boursa Kuwait July 2019

July’s performance was more active compared with June’s performance. Traded value, i.e. Boursa’s liquidity rose alongside a positive performance regarding all indices. The Premier Market index gained 5.8%, Main Market index increased by 2.4%, the All Share Market index (the outcome of the two markets’ performance) gained 4.9%. Al Shall Index also gained 4.8%.

Boursa liquidity during July achieved a higher level than that of June’s liquidity. The traded value was KD 979 million, rising from KD 660.2 million liquidity in June. The average daily trading value in July scored KD 42.6 million versus KD 36.7 million in June, reflecting a 16% increase above June’s average. Traded value in the first seven months of 2019 (144 working days) scored KD 4.825 billion, with an average daily trading value of KD 33.5 million. This represents a 135.5% rise compared with the same average of the same period of 2018 at KD 14.2 million. It also rose by 98.9% when compared with the same average of the entire previous year at KD 16.8 million.

Liquidity directions since the beginning of the year indicate that half of the listed companies obtained only 0.8% of that liquidity including 50 companies which captured only 0.1% of that liquidity, and 4 listed companies without any trades. As for liquid companies, 12 companies whose market value equals 1.5% of the listed companies’ value obtained nearly 6.7% of the Boursa liquidity. This means that major liquidity activity still deprives almost half of the listed companies from liquidity. On the contrary, it favors companies with smaller value. Liquidity distribution among the three markets during July 2019 was as follows:

The Premier Market (19 Companies)

It scored KD 764.7 million or 78.1% of Boursa liquidity, and 50% of its companies (9 companies) captured 88.7% of its liquidity and 69.3% of the entire Boursa liquidity. The other half of its companies (10 companies) captured what is left or 11.3% of its liquidity. Its liquidity concentration was high as 6 of its companies obtained 76.1% of its liquidity.

The Main Market (144 Companies)

It achieved KD 214.2 million or 21.9% of Boursa liquidity, and 20% of its companies obtained 90.1% of its liquidity while 80% of its companies obtained only 9.9% of its liquidity. It is good to recall that its companies’ weak liquidity was the primary factor for their classification within the Main Market which is open for evolution with the rise of liquidity of any of its companies.

Auctions Market (12 Companies)

It captured KD 58 thousand only, about 0.006% of the Boursa liquidity which is within anticipation. The main goal is to give those companies a liquidity regulating outlet even if they are left without any trading except at remote intervals. We may witness a single surge in their trading value every now and then.

The Weekly Performance of Boursa Kuwait

The performance of Boursa Kuwait for last week was more active compared to the previous one. Where the traded value, traded volume, number of transactions and the general index (Al Shall Index) increased. Al Shall Index (value weighted) closed at 537.9 points as of last Thursday, showing an increase by 2.5 points or by 0.5% compared with its level last week. While it increased by 108.9 points or by 25.4% compared with the end of 2018.