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Kuwait CBG strikes liquidity gold

Mohammad Al-Hashel, governor of the Central Bank of Kuwait, tells James King how a focus on shoring up capital adequacy has enabled Kuwaiti banks to withstand the pressures of the low oil price environment.
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Mohammad Al-Hashel

Mohammad Al-Hashel

The Central Bank of Kuwait (CBK) is widely regarded as one of the Middle East's most effective apex institutions. It has, in recent years, created a stable and resilient banking system and one that is considered well equipped to deal with future uncertainties. But getting to this point has not been easy; Kuwait’s banks were hit hard by the regional aftershocks of the 2007 financial crisis.

Recent years have since presented new challenges as lower oil prices have tightened liquidity conditions across the Gulf’s key banking markets. But Kuwait has emerged relatively unscathed from the worst of these difficulties.

“Thanks to our effective regulatory regime and strenuous efforts in collaboration with the banks to build strong buffers in good times, our banking system has been able to weather the low oil price environment fairly well,” says CBK governor Mohammad Al-Hashel.

Strong enough to cope

By almost every indicator, Kuwaiti banks are dealing with today’s challenges from a position of strength. This is important because, in many ways, the resilience of the country’s lenders will be vital to the success of its ambitious multi-decade reform programme.

“Our banks’ capital adequacy ratio stands at a robust 18.45% as of December 2017, well above Basel III requirements,” says Mr Al-Hashel. “We have also ensured, based on thorough analyses, the justified build-up of sufficient provisions. Consequently, the coverage ratio has reached a high level of 230.2%. Our banks are also well above the Basel benchmarks for the liquidity coverage ratio, net stable funding ratio and leverage ratio.”

Indeed, Kuwaiti banks enjoy an enviable liquidity position. According to the International Monetary Fund (IMF), lenders in the country maintain liquidity ratios of about 30%, far exceeding the 18% regulatory requirement. Meanwhile, the CBK has been praised for its liquidity management framework.

“We have already put in place a range of liquidity measures that help us effectively monitor and regulate the liquidity risk profile of the banking sector. Through our regulatory liquidity ratio of 18%, loan-to-deposit ratio of 90%, maturity ladder approach, foreign exchange net open positions, and the adoption of new Basel III liquidity standards such as the liquidity coverage ratio and net stable funding ratio, we are able to comprehensively regulate different aspects of liquidity risk,” says Mr Al-Hashel.

Our banks are well above the Basel benchmarks for the liquidity coverage ratio, net stable funding ratio and leverage ratio

Mohammad Al-Hashel

Drop in NPLs

Though Kuwait’s economy is experiencing challenges linked to lower oil prices, and subsequent production cuts by the Organization of the Petroleum Exporting Countries (OPEC), this pressure is yet to materialise on the loan books of the country’s banks. Indeed, asset quality has actually improved among lenders, despite a somewhat cooler domestic economic environment.

“Kuwaiti banks’ non-performing loan ratios have dropped to 1.9%, a historically low level. And growth in banks’ net income has remained healthy at a time when banks in many countries face serious pressures in remaining profitable. What these indicators collectively signify is the ability of Kuwaiti banks to play their role in credit intermediation with an ultimate aim to support economic growth,” says Mr Al-Hashel.

Quarterly stress-testing exercises conducted by the central bank have affirmed the sector’s ability to withstand most shocks, he adds. But further economic reforms are needed to ensure Kuwait’s growth trajectory is sustainable and that its financial sector remains resilient.  

“Comprehensive economic reforms are critical for the long-term sustainability of the economy and maintenance of financial sector stability. While our banking system remains sound and stable so far, its resilience is not infinite and may come under pressure if necessary economic and structural reforms are not implemented or are delayed,” says Mr Al-Hashel.

Non-oil sector upbeat

For now, however, the economy is on the right track. Growth is expected to pick up in 2018 and beyond, while non-oil activity will be at the forefront of these developments. Though both the IMF and the World Bank estimate Kuwait’s economy contracted in 2017, primarily as a result of oil production cuts, the non-oil private sector was a source of optimism in what was a more difficult year for the country.

“The estimated marginal contraction in the IMF/World Bank projections reflects the reduction in oil production as agreed upon in the OPEC-plus agreement of late 2016. Real non-oil activity within the same IMF/World Bank projections is estimated to register positive growth of about 2.5% in 2017, and again in 2018,” says Mr Al-Hashel.

“Official quarterly GDP figures indicate that for the first three quarters of 2017, real non-oil activity registered a growth rate of about 4.9%. With that in mind, as well as the expected stabilisation in oil output in 2018, we expect the overall economy to register a recovery of about 3.5% in 2018.”

Our decision to maintain the interest rate was driven by our economic conditions, which warranted a slower tightening in monetary policy stance

Mohammad Al-Hashel

Meanwhile, in December 2017 the CBK once again bucked the regional trend by maintaining its discount rate at the existing level of 2.75%, despite a rate hike by the US Federal Reserve. The CBK adopted the same position in July 2017 following a then quarter of a percentage point rise by the Fed. The central banks of Bahrain, the United Arab Emirates and Saudi Arabia all raised their key rates in July following the Fed move, and again in December.

“Indeed, the CBK kept its policy rate unchanged at 2.75% in December 2017, despite a rate hike by the Federal Reserve, which was followed by other central banks in the region. Our decision to maintain the interest rate was driven by our economic conditions, which warranted a slower tightening in monetary policy stance,” says Mr Al-Hashel.

Low rates for growth

Underscoring the CBK’s rationale was the desire to support private sector-led growth in the economy, according to Al-Hashel. “By not raising interest rates, we aimed to keep the borrowing cost for households and businesses at a lower level, thus encouraging greater private sector credit off-take. Moreover, inflation averaged 1.5% during 2017, recording a 13-year low, which further reduced the need for a rate hike,” he says.

Kuwait’s inflation dynamics are one of the most interesting elements of its recent economic trajectory. According to the IMF, positive food price developments and lower housing rents have offset price increases for energy and water to push inflation to a multi-year low in 2017. To put these figures into context, consumer price inflation was at 3.7% and 3.5% in 2015 and 2016, respectively. Though it is expected to increase in 2018 to reach 2.5%, according to IMF data, before spiking to 3.7% in 2019 as a result of the introduction of new taxes, it is likely to moderate thereafter to below 3%.

For now, Kuwait’s financial system and its banks in particular are in rude health. Much of this success is down to the work of the CBK’s prudent and stable leadership. If any criticism can be directed its way, it is that its guidance is too conservative. But having learnt the lessons from the last crisis it is clear that an approach to oversight and regulation that forsakes short-term profits for long-term stability is a far wiser method of oversight. And Kuwait’s central bank is doing just that.

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