Reform when oil price is sustainable

AL-SHALL WEEKLY ECONOMIC REPORT

We have not limited the number of draft bills at the National Assembly, which want to maintain prices of commodities and services at their level prior to the recession of the oil market in 2014 fall, but by two numbers, i.e. more than 10. This means a general case of denying that the oil market lost about 60 percent of its price level and that the reduction in oil prices is a long-term fact this time. There are several justifications for this orientation. First, the financial deficit is not real but a book one. Second, there is skepticism over the constitutionality of amending prices. The last one is the endless debate about the government’s overspending. The last one, the strongest in our opinion, is unfortunately correct. The ability to pass such proposals by laws has confirmed momentum because they submitted by all political spectra at the National Assembly, despite the wide differences among them. While the danger lies in the fact that sustaining this condition for the public finance is impossible with its cost to be paid by the overwhelming majority of ordinary people.

Goals of such laws are limited to revoking increased prices or intentions to increase prices of goods or commodities such as gas or the electricity unit. Not only that, the matter extended to the interest of the loans of the retirees and the pressure to reduce retirement age. As our concern is with the financial and economic aspects, we would like to stress that the government’s weak position is not debatable. The defense of reducing negative taxes -subsidies- without prudence in using funds makes them in constant retreat. We however assume that the government is not the State and preserving the State’s sustainability is the task of all. Therefore, the reform process should be fought in two fronts: fundamental reform for the expenditures side by severe punishment to the government’s overspending and gradual reinforcement of the revenues side. More importantly still is some rationalization to consumption as long as our goal is the State’s sustainability.

At the threshold of the third millennium a decisive advice has been offered to the two executive and legislative authorities that the reform timing is now, i.e during oil market prosperity. If they listened to this opinion presented from numerous parties, public spending would have not exceeded KD 8 billion by 2015. If that was achieved Kuwait would be remote from the current crisis of the general budget deficit and the sustainability of public finance would be possible at the current oil prices, or even lower. If it happened, Kuwait would have been closer to the financial condition of Norway.

Unfortunately, that has passed and became history and regret is futile. More dangerous still are the government’s reluctance to stop expenses waste and the popular proposed laws adopted by the national assembly. These actions push us in the direction of the bad Venezuelan conditions reaching of which is only a matter of time, one, two or three decades.

To avoid repeating the sin of the beginning of the current millennium we should have a break or a pause during which a neutral party is entrusted with making projections on figures. After that making any decision in any direction is fine if the conviction is to guarantee the State’s financial sustainability and its stability regardless of its financial policies.

The Boursa and withdrawals

There is a debate over the withdrawal of listed companies from the official market in Boursa. Due to the large number of withdrawing companies or the ones wanting to withdraw, controversy over this phenomenon is stigmatized as negative trend. We have monitored that phenomenon from 1/04/2011, when the number of listed companies reached the maximum and scored 217 companies. Though any conclusive judgment of this phenomenon may not be precise, yet we still believe it is a positive development and in favor of the Boursa for the medium term. As of the date of preparation of the report, 42 companies withdrew and another 9 companies had fixed withdrawal date making the total at 51 companies.

Meanwhile, 8 new companies have been listed. The market capitalization value of withdrawing companies at their withdrawal date and those that will withdraw as of 31/03/2017, scored KD 1.308 billion, i.e. 4.6 percent of market capitalization value of all market in the end of the first quarter of 2017. But in terms of percentage, they form 23.6 percent in the peak date, which means they are mostly small companies, non-liquid and losers. Including, 6 companies are out of these negative descriptions because they may be relatively large, a gainer or both. But for a certain reason they are not liquid and their market price is falling without justification which keeps their listing without a purpose, therefore they decided to withdraw.

On the other hand, only 8 companies have been listed with a market capitalization value of KD 1.292 billion in the end of the first quarter of the current year. This amount is almost equal to the value of all withdrawing companies or those wanting to withdraw. The liquidity of their shares is higher than those withdrawing ones. Despite the withdrawals, the current number of listed companies is 178 companies, and will be reduced to 169 companies during the current year unless new companies are listed, after the withdrawals of listed companies that wanted to withdraw the number of the second highest listed companies in the region after the Saudi market which contains 176 companies.

It seems that the Boursa Company had a good start being supported by its high liquidity during the current year, until now. Withdrawal of small and dangerous companies should reduce risks of trading in the Boursa and increase trust in its trading. We do not encourage its resistance though it entails some income losses in the near term. The positive effort should be confined to replacing withdrawing companies by convincing large and solvent companies to be listed at the Boursa. The last experience shows the weight of 8 new listed companies which equaled the weight of 51 withdrawing or will withdraw companies.

IMF Economic Development Report

IMF issued a report on economic development on April 18, 2017. Its figures contain some discrepancies. The global economy is anticipated to grow at 3.5 percent in 2017, as compared to 3.1 percent in 2017. This grow is anticipated to reach 3.6 percent in 2018. The projected rise in growth rates will include the developed countries, emerging economies and the low-income states. The underlying drive of that growth is the improvement in the industry and trade sectors.

The developed economies will raise their growth rates from 1.7 percent in 2016 to 2 percent in both 2017 and 2018, with the highest growth rate in the American economy, which is the biggest economy in the world by 2.3 percent and 2.5 percent in 2017 and 2018 respectively. The emerging and developing economies will raise their rates from 4.1 percent in 2016 to 4.5 percent and 4.8 percent in 2017 and 2018 respectively. The main support will come from the exceptional growth of the Indian economy by 7.2 percent and 7.7 percent in 2017 and 2018. The irony is the projections of continued loss of the Chinese economy of a margin from its growth rates, which will drop from 6.7 percent in 2016 to 6.6 percent in 2017 and 6.2 percent in 2018, though policy makers in China believe in achieving higher growth rates.

That optimistic view for the economic growth excludes the GCC states for 2017. Bahrain alone, for instance, and despite the big deficit in its current account 3.6 percent of its GDP- adjusted its growth rates upwards from 1.8 percent in a former report to 2.3 percent in the current report. The report maintained the same growth rates in both the former and the current reports for KSA and Qatar; weak for KSA at 0.4 percent for this year. Qatar on the other hand achieved the highest growth rates among the GCC states at 3.4 percent in both reports. The report reduces the growth rates projected for other three GCC states in 2017. UAE which is the lower growth rate, or from 2.5 percent in a former report to 1.5 percent in current report; Oman from 2.6 percent to 0.4 percent, and only Kuwait received the highest reduction in the growth rate along with all the other indicators, that lagged behind, from 2.6 percent to negative growth at 0.2 percent in the current report.

All other factors, which contributed to weakened growth of GCC states, apply to Kuwait. Weak oil prices and instability in the region are among the common factors. But the negative growth in our opinion is due to its inability to adopt and financial or economic reform policies. Even that shy and modest step it adopted in the reform road is/or will be abandoned. It also lagged in the indices of corruption perceptions, business practices climate, competition and transparency. There should be a minimum limit of awareness and concern to avoid some future risks.

Kuwait International Bank (KIB)

Kuwait International Bank (KIB) announced results of its operations for the first quarter of the current year, which indicate that the bank’s net profits, after deducting taxes, scored KD 7.61 million, increased by KD 879 thousand, or by 13 percent, compared with KD 6.73 million for the same period in 2016. The rise in net profits is due to the decrease in total provisions by about 41.1 percent and the rise in total operational profit prior to deducting provisions by about KD 1.2 percent.

Bank’s total operational incomes increased by higher value than the rise in operational expenses by KD 389 thousand, or by 2.5 percent, to KD 15.9 million compared with KD 15.51 million for the same period in 2016. Due to the rise in the item of investment income by KD 1.5 million to KD 2 million (which form 12.4 percent of total operational incomes) versus KD 420 thousand (about 2.7 percent of the total). While, the remaining operational items of incomes decreased by about KD 1.1 million to KD 13.9 million compared with KD 15.1 million.

Total operational expenses rose by KD 284 thousand, or by 4.4 percent, and scored KD 6.73 million compared with KD 6.45 million in the same period of 2016, due to the rise in the item of staff costs by KD 360 thousand to KD 4 million (KD 3.63 million). While the total provisions dropped by KD 841 thousand, or by 41.1 percent, as mentioned, to KD 1.2 million (KD 2.04 million). This explains the rise in the net profit margin to 45.4 percent compared with 40.4 percent in the same period of 2016.

The bank’s financial statements indicate that the bank’s total assets increased by KD 64.5 million, or by 3.5 percent, to KD 1.911 billion (KD 1.846 billion in the end of 2016), and increased by KD 128.5 million, or by 7.2 percent, when compared with the same period of 2016, which scored KD 1.782 billion. Item of financing receivables rose by KD 29.6 million, or by 2.3 percent, to KD 1.298 billion (67.9 percent of total assets) versus KD 1.268 billion (68.7 percent of total assets) in the end of 2016. And rose by KD 113.2 million, or by 9.6 percent, compared with the same period of 2016, when it scored KD 1.185 billion (66.5 percent of total assets), in the same period of 2016. Percentage of total financing receivables to total deposits scored 80.8 percent compared with 79.6 percent. But item of dues from banks dropped by KD 3.9 million, or by 1 percent, to KD 389.4 million (20.4 percent of total assets) versus KD 393.3 million (21.3 percent of total assets) in the end of 2016. It dropped by 12.4 percent, or by KD 55.2 million, compared with KD 444.6 million (24.9 percent of total assets) in the same period of 2016.

Figures indicate that the bank’s liabilities (without including total equity) increased by KD 66.5 million, or by 4.2 percent, to KD 1.657 billion versus KD 1.591 billion in the end of 2016. It rose by KD 121.6 million, or by 7.9 percent, compared with the total in the end of the first quarter of the previous year. Percentage of total liabilities to total assets scored 86.8 percent compared with 86.2 percent.

Result of analyzing financial statements calculated on annual basis indicates that all bank financial indexes scored increase compared with the same period of 2016. The average return on equities relevant to the bank’s shareholders (ROE) increased to 12.1 percent versus 11 percent. Likewise, the average return on capital (ROC) increased to 29.4 percent compared with 26 percent. Also, the average return on assets (ROA) increased to 1.6 percent compared with 1.5 percent. EPS scored 8.1 fils versus 7.2 fils. (P/E) scored 7.3 times versus 6.8 times as a result of increased the share market price by 21.4 percent compared with its price on March 31, 2016, against less rise in profitability of (EPS) by 12.8 percent from its level in the end of March 2016.

The weekly performance of Boursa Kuwait

The performance of Boursa Kuwait for the last week (4 working days due to the AlIsraa and Al-Miraj holiday) 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. AlShall Index (value weighted) closed at 382.3 points at the closing of last Wednesday, showing a decrease of about 5.7 points or about 1.5 percent compared with its level last week, while it increased by 19.3 points or about 5.3 percent compared with the end of 2016.