Sheikh Salem Abdul Aziz Al-Sabah is an optimist. Nothing else can explain his 20-year stint as governor of the Central Bank of Kuwait, eternally ignored in his calls for privatisation and the development of the country’s capital markets. Nor his belief that the Gulf Cooperation Council’s (GCC) quest for a single currency by 2010 stands a good chance. Let alone his confidence that Kuwait can be a regional financial centre.
Longevity
Known by other central bank governors as the “big survivor” and an “intelligent and balanced man”, and by Kuwaiti bankers as “the father of all the banks”, Sheikh Salem has spent his entire career at the central bank. Following an undergraduate degree at the American University in Beirut, Lebanon, he started off as an economic analyst in the foreign operations department in 1977 and worked his way up through the areas of banking supervision and monetary policy until becoming governor in 1986, something he is keen to point out when asked whether being part of the ruling Al-Sabah family gave him a sense of entitlement or duty.
“[It gave me] both,” he says in an interview during the International Monetary Fund/World Bank annual meetings in Singapore. “I have to do a lot for my country, not just something. But being a member of the ruling family has nothing to do with my position, by the way, because I started with the central bank and took so many posts in it,” he adds.
Sheikh Salem Abdul Aziz Al-Sabah, Central Bank of Kuwait
Sheikh Salem also sits on the board of the Kuwait Investment Authority, which is in charge of managing foreign investments for the state, and he “has strong tentacles throughout the rest of Kuwait society”, according to Keith Wood, a former adviser to the governor, originally employed by the Bank of England.
The new Emir, or ruler, of Kuwait, Sheikh Sabah Al-Ahmed Al-Jaber al-Sabah, took power earlier this year, following the death in January of his half-brother, the ailing Emir Sheikh Jaber al-Ahmed. The vision of Kuwait as a regional financial centre is the new ruler’s pet project, one he was working on in his prior role of prime minister.
But with Dubai and Bahrain already far advanced, and Qatar and Saudi Arabia well on their way (see The Banker, June 2006), an anonymous quote from a rating agency director that the Kuwaitis don’t have “a hope” of becoming a regional financial centre rings true. The country’s geographical location – virtually surrounded by an Iraq that is rapidly descending into outright civil war, and close to Iran, facing international opprobrium over its nuclear programme – is a distinct disadvantage.
“Wait a couple of months and ask me again,” says the 55-year-old governor by way of retort. “It depends on what is the definition of a financial centre. It is not only the presence of foreign bank institutions – this is not a financial centre.”
Banks restricted
Foreign banks have only recently been allowed into the country. Last year, HSBC and BNP Paribas were among those that opened in Kuwait. With foreign banks allowed just a single branch, it is difficult to see what competition they can bring to the market.
“The central bank was asking, ‘let any bank have 10 branches in Kuwait’, why not!” exclaims Sheikh Salem. “But we have to respect democracy. So the law only allows the presence of a single branch.”
Kuwait’s vociferous parliament has been a stultifying force in the modernisation of the country. Project Kuwait, for instance – an attempt to increase oil output – has been left on the back burner for almost 10 years, while the Privatisation Law remains a piece of paper. As a result, only 26% of gross domestic product (GDP) came from the private sector in 2005 and this looks unlikely to change. Additionally, the country remains among the least diversified of the GCC states, according to the IMF. In the 11 months to March 2006, oil revenues contributed 95% of total budget revenues.
The same is true of the capital markets, which surely would be a major component in Kuwait’s dream of being a regional financial centre. “I have to admit we have been slow [in encouraging the development of the capital markets]. The main source of borrowing is from banks,” says Sheikh Salem, who would like more companies to gain access to medium- and long-term funds from the capital markets rather than through shorter-term banking loans.
He says the government’s role in this is to provide a supportive legislative framework and insists there are “other means of developing and remodernising the existing laws related to the capital markets”. It is difficult to see how parliament can be bypassed, but it may prove the only hope in order to move the agenda forward.
Single currency
Meanwhile, the goal of a single currency in the GCC by 2010 looks doubtful when there is not even a name for it, let alone much agreement among component countries Saudi Arabia, the United Arab Emirates, Kuwait, Oman, Qatar and Bahrain.
“To introduce a single currency among single nations is not an easy issue. You have to admit that,” he says with a heartfelt sigh that allowed one to imagine the endless meetings and arguments he must have sat through over recent years and the many he will sit through in the years to come. “It requires many economic, institutional and administrative arrangements. I have to admit we have been slow for the past two years. But we believe we can achieve that.”
As part of the lead-up to the single currency, in 2003 Kuwait, which holds 8% of the world’s oil reserves, pegged its currency to the dollar. In the years between 1973 and then it had pegged it to a basket of currencies.
Mr Salem, who is known to visit Tottenham Court Road when he is in London to view the latest electronic technology, should perhaps not be judged on the issues that are out of his control and that rely on other entities, such as the legislature. Instead, one should look at the state of the banking sector in Kuwait.
“The banking system in Kuwait is in pretty good shape,” says Rory Keelan, a senior analyst at rating agency Capital Intelligence. “The central bank in Kuwait is a conservative institution but it should be, due to the problems of the past.” In 1982, there was a crash in the unofficial Souk al-Manakh stock market. Earlier this year, the Kuwait stock market (along with those of other GCC countries) suffered a sharp correction.
Two years ago, the central bank introduced a rule whereby banks could only lend against 80% of their deposits in order to stem what it saw as a worrying over-expansion of credit.
Sheikh Salem dismisses bankers’ moans about this, citing hard evidence: “They are claiming there has been a problem. When we introduced such an instruction in July 2004, the credit portfolio of the banking system was about 9bn Kuwaiti dinar ($31.1bn). Today it is almost 13.5bn Kuwaiti dinar.”
In 2005, private sector credit grew 20%.
He has also managed to keep inflation in check – it was 4.1% in 2005 – which is not an easy task when funds are pouring in. When asked how much comes in oil revenue every day, Sheikh Salem says he has not calculated it but suggests multiplying 2.1 million barrels a day by $59 a barrel – that equates to $124m. In 2005, Kuwait had a current account surplus of $32.6bn, equivalent to 40.4% of GDP, according to a report from the International Institute of Finance, an association of financial institutions.
Endless battle
Fighting endless battles for change and believing, after 20 years, that you will one day win them shows a positive attitude to life. It must have been severely tested when the Iraqis invaded in 1990. Sheikh Salem was forced to flee Kuwait overland in a convoy to the Saudi Arabian border in temperatures averaging 50 to 60 degrees Celsius. His homes were destroyed and the central bank vaults were looted. “Well, it is an old story, in the past. Now it is a different regime,” he says.
