Kuwait budget may show KD3.5bn to KD4.5bn deficit for 2015/2016

AL-SHALL WEEKLY ECONOMIC REPORT

KUWAIT: By the end of June 2015, which is the end of the first quarter of the current fiscal year 2015/2016, average oil price scored $59.1 per barrel, which is $ -1.6 per barrel lower (2.6 percent) than the average of May at $60.7 per barrel. Its price is higher by $14.1 per barrel (31.3 percent) than the new hypothetical price per barrel for the current budget at ( $ 45 per barrel). However, the price is lower by $ -15.9 than the hypothetical price for the past fiscal year which was $ 75 per barrel. The average price for the Kuwaiti oil in June 2014 scored $ 106.3 per barrel. The last fiscal year ended March 31, 2015 scored $81.3 per barrel. This means the average price for June 2015 lost about -27.3 percent of the average price of the barrel of oil for the past fiscal year and lost -44.4 percent of the average price for June 2014.

Kuwait is supposed to have achieved oil revenues in June about KD 1.2 billion. Assuming production and prices would continue at their present levels -an assumption which may not be realized- it is expected that value of potential oil revenues for the entire current fiscal year would score about KD 13.8 billion, which is higher by about KD 3.2 billion than the oil revenues estimated for the budget. Adding about KD 1.5 billion in non-oil revenues, which exceeded $2 billion for each of the past two fiscal years, total budget revenues for the current fiscal year would score KD 15.3 billion. Comparing this figure with the expenditures allocations of about KD 19.1 billion, the general budget for the fiscal year 2015/2016 would likely be in a deficit by about KD 3.5 to 4.5 billion for the FY 2015/2016. However, the deficit figure depends mainly on the average oil price and its production in the remaining part of the year (9 months). Certainly, after the lapse of one quarter of the year, Kuwait is passing through different conditions from those it passed through during the prosperity era 2003-2014. The first quarter of the current fiscal year is only an indicator to the substantial difference. It warrants making essential changes in the financial policy after the inflation in its expenses and reduction of its expenditures.

KSE liquidity features

Market liquidity during the first half of 2015 achieved a daily trading average value by KD 19.3 million, with less liquidity by -30.3 percent compared with the average daily trading value for the first half of 2014. The market added liquidity in the amount of KD 337.7 million during June bringing the total market liquidity in the first half of the current year to KD 2.411 billion. It was noted that market liquidity is in continued decline between the beginning of the year and the end of June. The daily value was at KD 26.4 million in January, and dropped to KD 25.6 million in February, and to KD 16 million and KD 18.8 million in both March and April respectively, KD 15.7 million in May and KD 15.3 million in June. That sustained decline as represented in graph (1) may have influenced a change in the liquidity characteristics.

Adopting the same measurement tool, i.e. following up the share of the top 30 companies from trading value, in the 1st half, we note these companies captured about 72.1 percent, equal to KD 1.737 billion, of market liquidity representing 62.4 percent of its total capital value. The number of speculation companies within the sample was 18 companies which captured 35 percent of total market trading value, i.e. KD 843.2 million, while their market value equaled 5.3 percent of total market companies. This means continued reduction in the severity of speculative transactions.

The turnover average per share index might provide us with a different perspective to view the speculation severity. The index measures the ratio of the company trading value over its capital value. While the turnover average of all market companies continued weak at about 8.4 percent (16.8 percent on annual basis) and weak within the sample for the 30 companies highest in liquidity at about 9.7 percent (19.4 percent on annual basis), it scored about 55.2 percent (110.4 percent on annual basis) for the 18 companies. It scored about 732.8 percent for the highest company, 524.3 percent for the second highest and 358.6 percent for the third highest.

Despite their high rise, if calculated on annual basis, they remain much lower than their historical turnover rates. But what we cannot confirm is whether this reduction is the outcome of awareness or tightened supervision, which are sound phenomena if that is the case, or the result of wearing market liquidity due to increased risks against reduced probable turnover, or it is perhaps a mixture of both.

Comparative performance

By the end of June, the first half of the current year ended and performance during June was remarkably negative. The heated geopolitical conditions coincided with the heated Greek crisis and cause additional weakness to the oil market. During June, 9 markets out of 14 lost varying percentages of their indexes while 5 markets only achieved some gains. By the end of the first half of the year, the positive performance in its past part was prevalent. The markets which achieved gains since the beginning of the year were 9 while the number of markets in the negative zone was 5 up from 3 in May.

The biggest losers in June was the Chinese market which lost -7.3 percent, the British market came next by losing -6.6 percent and the Saudi market came third by -6.2 percent loss. It is noticeable that most global markets either being mature, emerging, or regional, sustained losses. This is logical due to the mixed justifications this time. The Greek crisis, forecasts of increasing interest, weak performance of main economies, the heated geopolitical conditions and the reflections of all the foregoing on the oil market did not save many markets from their negative impacts. Gainers in June, though varying gains, were 5 markets in the region in order: Abu Dhabi with 4.3 percent gains, Dubai with 4.2 percent gains, governed by the same impacts, Qatar with 1.3 percent gains, and then Muscat and Bahrain with 0.6 percent and 0.3 percent respectively.

The outcome since the beginning of the year is still in favor of the oilconsuming markets. The Chinese market is still gaining about 32.3 percent and leads the gaining markets. The Japanese market comes second with 16 percent gains, the French with 12.1 percent. The negative zone still includes three regional markets in addition to the American market and the British market. At the lower end of the negative zone lies the weighted index of Kuwait Stock

Exchange with -4.3 percent loss (the price index lost -5.1 percent). The Bahraini market was at the lower end in May. The second biggest loser was the Bahraini market which lost -4.1 percent. The American market shared them in losses with -1.1 percent when it lost in one single day -June 29- 350 points, then came the Qatari market with -0.7 percent loss which equaled the British market’s loss.

Forecasting the performance for July is extremely difficult. Greece which is conducting a referendum today on austerity proposals, imposed by the Euro Zone, knows well that its exit from the Euro zone is like an economic suicide. If it exits, this exit will be followed in the short term more negative performance for the main and emerging markets. Its impacts on the performance of the regional markets will be indirect specifically in increasing pressure on the oil prices with its psychological negative impacts. But if they interact with more escalation on the geopolitical front, the regional markets might turn into negative performance. The opposite is also correct if the Greek crisis finds a solution.

KSE performance H1

KSE performance during the first half of 2015, was less active vis-a-vis the first half of 2014. Its entire main indexes, as well as value of the general index, dropped. Performance of the second quarter was not supportive vis-a-vis the first quarter, but it deepened the slowing performance. It exacerbated the drop in the value, volume indexes, the number of transactions and value of the general index. AlShall index reading at the end of June 2015 scored about 418.8 points, drop by -25.2 points, or by -5.7 percent, compared with its closing in the end of last year. To measure the total return at the domestic stock exchange during the period, we should add the distributed cash yield during the first half of the current year which was close to 3.9 percent. This means the total drop at the stock exchange, according to AlShall index, was about 1.8 percent. It is worth mentioning that AlShall scored its highest index reading during the first half of the year was on February 24, 2015 at 462.1 points, i.e its increased by 4.1 percent rise versus 444 points on the end of 2014 and the lowest was scored on May 28, 2015 at 413.5 points.

Performance of the main indexes during the first half of the current year compared with the end of 2014 was negative. The weighted index decreased by -4.3 percent and scored 419.9 points (438.9 points). Kuwait 15 Index decreased by about -4.1 percent. Also, the price index also declined by -5.1 percent and scored 6,203 points (6,535.7 points in the end of 2014). In fact, the Kuwait Stock Exchange is one of the few bourses which did not recover from the global financial crisis of 2008. It worsened since 2014 fall with the beginning of major weakness in the oil market. Besides, regional geopolitical conditions and local political events exacerbated the decrease in its liquidity and reduced credibility.

Liquidity during the first half of 2015, scored about KD 2.411 billion, ie $ 7.937 billion, a daily average trading value of about KD 19.3 million which is -30.3 percent lower than its counterpart in the same period 2014 at KD 27.7 million. Liquidity was the highest in January during the first quarter, in which trading value was at KD 501.5 million, 20.8 percent of total trading value of the first half of this year. The lowest trading value was in May at KD 329.4 million, 13.7 percent of total trading value of the first half of this year. The financial services sector came first in liquidity and captured KD 572.5 million, 23.7 percent, of total trading value. The banking sector came second by 23.5 percent, the telecommunications sector came next by 17.6 percent and the real estate sector by 16.1 percent. Value of traded shares during the first half scored 8.4 percent of the market’s capitalization value, a turnover rate by 16.8 percent calculated on annual basis.

Volume of traded shares scored 25.321 billion shares, a daily average of 202.6 million shares, which is a lower by -12.7 percent than its counterpart value in 2014. Number of transactions scored 571.4 thousand deals, with a daily average scored about 4,571 deals, which is lower by -8.3 percent than its counterpart value in 2014.

The first half closed on a market capitalization value for all the -192 listed companies- (Listing Meezan Holding Company) scored KD 28.756 billion. When we compare their value between the end of June 2015 and the end of December 2014 for 191 companies, we note they decreased by KD -1.260 billion from KD 29.708 billion on 31/12/2014 to KD 28.447 billion, or by -4.2 percent. It is worth noting that the number of companies whose value increased, compared with the end of last trading day of 2014, was 46 companies out of 191 companies, 135 companies scored varying losses in their values, while value of 10 companies did not change. If we exclude the companies whose capital was increased or reduced, the Kuwait Syrian Holding Company scored the highest rise in value by 120.7 percent; Humansoft Holding Company came next by 115.6 percent rise. On the other hand, the Kuwait Gypsum Manufacturing and Trading Company scored the biggest loss in value of -40 percent. Al-Madar Finance and Investment Company came next by a loss of -37.9 percent of its value. 11 sectors out of 12 dropped in value. The oil and gas sector scored the highest drop by -13.9 percent. The telecommunications sector scored the second highest drop in value by -13.7 percent. But the insurance sector rose by 0.4 percent, the only sector which increased. In general, the performance of the first half of the current year does not tell it is promising. The resultant was adding weakness to the liquidity, which is already weak, the fall of justified and unjustified drop in the market indexes. Certainly, it is a crisis of reduced confidence that requires diagnosis and structural remedy.

The following graph illustrated distribution of the market capitalization value according to sectors as of the end of the first half of 2015.

The weekly performance of KSE

The performance of Kuwait Stock Exchange (KSE) for the last week was mixed, where the indices of the trade value and the general index, show a decrease, while the trade volume, and number of transactions shows an increase. AlShall Index (value index) closed at 417.4 points at the closing of last Thursday, showing a decrease of about 3.9 points or about 0.9 percent compared with its level last week, and it is a decrease by 26.6 points or about 6 percent compared with the end of 2014.