Falling oil prices and IMF statement
AL-SHALL WEEKLY ECONOMIC REPORT
KUWAIT: The decline in oil prices and production is still in the beginning. Nevertheless, the IMF statement about Kuwait on September 21, 2015 provided an account statement with the negative preliminary consequences for those developments the most dangerous of which is that it was with the Public Administration more than a decade ago.
Instead of hedging against the probability of the occurrence of these developments, it did the opposite of what that precaution requires. The brief statement of account mentions the drop in economic growth rates of the oil and non-oil sectors in 2014 and in 2015 as well, negative impacts on internal and external balances, rise in inflation rates in July 2015, rise in housing services despite the slow economic growth, decline in stocks prices by 16 percent until the end of August 2015, confirming that the position of the public finance has become unsustainable.
On governmental procedural level, the statement stated that the government increased diesel and kerosene prices, reduced subsidy to aircraft fuel, reduced treatment charges abroad for the citizens and their escorts, reduced travel allocation for civil servants, all of which are like Panadol prescriptions at public clinics. The statement missed to say that the main issue to the government is how to finance, but not to treat, the deficit and whether it is better to withdraw from the reserve or borrowing, internal or external. In fact, if the deficit origin is not resolved, borrowing is nothing but a deferred withdrawal from the reserves and by their guarantee.
The IMF statement reconfirms that the public finance status is unsustainable and estimates the probable accumulated deficit during 2015-2020 period by about KD 23 billion, about 10 percent of GDP annually in the medium term. It recommends for Kuwait to adopt a long term comprehensive strategy to remedy the public finance conditions. Sustainability according to the statement requires reforming the current spending side through reforming subsidy and wages system, improving capital spending efficiency, securing justice among generations, and beginning other structural reforms, all of which were measures adopting publicly and theoretically by successive governments but did the opposite completely.
The statement however contains an illuminating point, i.e. procedures of the Central bank of Kuwait whose policies area unpopular and may be unacceptable from the banking sector in the short term and may not be correct by necessity but they are effective. The capital adequacy ratio of the sector is now 16.9 percent according to Basel (3). Ratio of irregular debts is 2.8 percent and its coverage percentage is 172 percent. Exposure of the banking sector to investment companies retreated to 2.8 percent out of its total loans. Therefore, it has become a secure sector despite the negative oil market developments. The exchange rate policy basket of currencies-played its role. The Kuwaiti dinar lost 6.8 percent of its value against the US dollar, the oil currency, which is indirect support to the public finance, while its exchange rate against other currencies which are not pegged to the US dollar rose.
In conclusion, the public administration did not respond to all old advice to adopt hedging policies but did the quite opposite. When forecasts of weak oil market were realized, it does not seem to understand its seriousness and until now, it did nothing but some beautification touches. The danger is such behavior is that it buys some time until conditions become more complicated and non repairable.
Real estate sector
The latest available data at the Ministry of Justice -the Real Estate Registration and Authentications Department-, excluding crafts activity, parking lots and the coastal strip, indicate rise in the real estate market liquidity during September 2015 vis-a-vis August 2015 liquidity. Total value of contracts and agencies trading scored KD 204.3 million, which is higher by 2.2 percent than its value in August 2015 in the amount of about KD 199.9 million but it dropped by -48.4 percent compared with September 2014 trading.
September 2015 trading was divided between KD 197.2 million for contracts and about KD 7.1 million for agencies. Number of real estate struck deals in the month was 329 deals distributed between 315 contracts and 14 agencies. The highest share went to Al-Ahmadi Governorate which captured the highest percentage in the number of real estate deals (113 deals) representing about 34.3 percent of the total number of deals, followed by Hawally Governorate by 62 deals, representing approximately 18.8 percent, while the lowest share went to Al-Jahra Governorate by 24 deals representing about 7.3 percent.
Value of private residence trading scored KD 88.9 million, up by about 3.2 percent, compared with KD 86.2 million for August 2015 representing 43.5 percent of total value of real estate trading compared with 43.1 percent in August 2015. The monthly average value for private residence trading in 12 months scored about KD 143.4 million. This means that trading value in this month is lower by -38 percent compared with the average. Number of deals for this activity dropped to 226 deals compared with 263 deals in August 2015. Therefore, the average value per deal of private residence activity scored about KD 393.6 thousand.
Value of investment residence activity decreased to KD 67.5 million, a drop by -20.7 percent, compared with KD 85.2 million in August 2015. Its percentage share out of total liquidity decreased to about 33.1 percent versus 42.6 percent in August 2015. The average value for investment residence activity trading during 12 months scored KD 120.9 million, making value of this month trading lower by -44.2 percent than the 12 month average. Its deals scored 91 deals (153 deals in August 2015). As such, the average value per deal for the investment residence was about KD 742.1 thousand.
Value of the commercial activity trading rose to about KD 46.1 million, a 77.9 percent rise compared with KD 25.9 million in August 2015. Its percentage share out of total real estate trading value rose to about 22.6 percent (13 percent in August 2015). Average value of commercial activity transactions in 12 months scored KD 45.7 million which means that trading value during this month was higher by about 0.8 percent than the 12 months’ average. Its transactions increased to 11 deals (8 deals in August 2015). Therefore, the average value of the commercial deal was at approximately KD 4.19 million. Value of warehousing trading activity was at approximately KD 1.7 million (1 deal).
When we compare September 2015 trading with September 2014, we note decline in the real estate market liquidity from about KD 396 million to KD 204.3 million, i.e. -48.4 percent. The drop involved the private residence activity by 45.2 percent, the investment residence activity by -68 percent while the commercial activity liquidity rose by 171.9 percent.
If we compare total trading value from the beginning of 2015 until September 2015 with its counterpart in 2014, we note a drop in total real estate market liquidity from KD 3.776 billion to KD 2.534 billion, i.e. -32.9 percent. Assuming market liquidity would continue in the remaining three months of the year at the same level, market trading value -contracts and agencies- would score KD 3.379 billion, which is lower by KD 1.613 billion, or -32.3 percent, than 2014 value which was worth KD 4.992 billion. This means indicators hint at a drop in the real estate market’s liquidity.
Corruption
In the last two years, Kuwait ranked last within the GCC Organization in terms of Corruption Perceptions Index. Its order was 69 in 2013 and 67 in 2014. In other words, it got 43 and 44 points out of 100 in the two years respectively. In 2012, Law Decree No. 24 for 2012 was issued establishing the Public Authority for Fighting Corruption and the special provisions of disclosing wealth assets. Out of the backward position of Kuwait on the Corruption Perceptions Index, it does not seem that establishing the Authority has been reflected positively on improving the corrupt environment until now at least out of the feeling of fear from its existence. When it was established, we commented in a paragraph in one of our reports that its strength lies in its respect. It has proven corruption cases relevant to bribes to politicians -26 percent of parliament members-and it will not gain respect without their follow up. The basis in confronting corruption is the feeling of deterrence which will not happen without the spontaneous action of the Authority and executing punishment starting with the ‘big heads’.
The reason underlying this paragraph is that the Prime Minister submitted last week a statement showing all his wealth assets, which is good, because implementing the requirements of the law should begin with the big ones but to waste three more years without a noticeable improvement in the corrupt environment, submitting lists of wealth assets is insufficient. The general feeling of immunity from punishment is a result of weak supervision systems, poor governance procedures, lack of taxation system, and more importantly, not only the safety of the corruptors from major corruption cases but also their participation with the decision-making authorities as well. There is no guarantee that correct lists of wealth assets shall be submitted neither is there a guarantee that the one who submits the incorrect list shall be punishable. Finally, the ability for analysis and follow up, in addition to judgment and punishment has not been tested or known yet.
The danger lies in the time factor. The time when corruption cases were covered by opening the public treasury for gifts and grants has gone; the weak oil market will lead to pressure on the labor market -unemployment- and other basic services. Under such disturbed conditions around Kuwait and the congestion inside it, the last thing that Kuwait needs is continuing the corrupt environment. Adopting very due economic and financial reform policies is impossible with such an environment. But development, with its positive meaning, will be no more than mirage. Therefore, we believe that it is necessary to start executing decisive procedures against existing corruption as a first step, and prepare to expand in confronting potential corruption in the later stage.
Impacts of weak oil market on
consumers
The country which more con- cerned with information and its utilization is the United States. Preliminary figures for its GDP growth in the first half of 2015 indicated its weakness by scoring 1.4 percent. But it was believed that this weakness is due to the modest percentage of consumers who direct their saving from fuel budget to consuming commodities and other services. According to the ‘Economist of 08/10/2015 issue, the saving in the fuel prices for the consumers in the USA was onethird. According to Gallup, the percentage of consumers who direct their saving to other commodities did not exceed 24 percent, which was inadequate to stimulate economic growth. However, the adjusted economic growth figures resulted in a considerable positive development. It stimulated the growth rate for the first half of 2015 by 2.3 percent which makes the views of JP Morgan for Research issued recently closer to accuracy.
Estimates imply that the American family on average -the income available for consumption-benefited from a saving by $ 700 in 2015, which is higher than the amount it obtained from tax exemption within the stimulation policies which was adopted by the United States in the aftermath of 2008 crisis. The research team of JP Morgan estimated in a study for a one million credit card holders sample that every 73 saved cents go to other commodities and services. Private consumption in the USA is the main generator for GDP by about 68.3 percent in the first half of 2015. This means that most of the saving is not used to pay loans or for saving. The American is still fond of consumption. Because its economy produces commodities and services, this is interpreted to supporting economic growth.
In our opinion, the American model may be generalized to all oil-consuming economies with bigger benefits to some because the USA lost some investments in the non-conventional oil sector contrary to China or Japan or Germany, the 2nd, the 3rd and the 4th largest global economies respectively.
It is important to know that the oil market cycles have reoccurred three times throughout half a century. All oil consuming economies learned from the past prosperity of oil market by adopting hedging policies. On the other hand, except for Norway, the oil exporting countries repeated the same old sins and did not learn from the past oil market weakness. Another paragraph of this report sheds light on Kuwait case model.
The weekly performance of KSE
The performance of Kuwait Stock Exchange for the last week (3 working days due to Hijri New Year 1437 Holiday) was less active than the previous one, where all indexes showed a decrease, the traded value index, the traded volume index, the number of transactions index, and the general index also showed a decrease, Al-Shall Index (value weighted) closed at 376.2 points at the closing of last Tuesday, showing a decrease of about 0.5 points or about 0.1 percent compared with its level last week and it decreased by 67.8 points or about 15.3 percent compared with the end of 2014.