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InterviewsJune 3 2009

Sheikh Salem Abdulaziz Al-Sabah

Sheikh Salem Abdulaziz Al-Sabah, governor of the Central Bank of KuwaitThe governor of the Central Bank of Kuwait discusses the impact political instability is having on the country and the effect he hopes the new Financial Stability Law will have. Writer Stephen Timewell
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Sheikh Salem Abdulaziz Al-Sabah

Q: In March, Moody's Investors Service said it may cut Kuwait's sovereign rating due to a protracted political crisis which is threatening the country's ability to cope with the financial downturn. How do you see the impact of the political turmoil on the economy?

A: Such events as a drop in rating alert us to the urgent need to sustain a political atmosphere that best prepares us to counter the economic challenges. We must reach a national consensus on economic issues and take steps and measures to overcome the economic slump. We want political stability. Over the past two years there has been disagreement between parliament and government but the impression of instability is not correct.

Q:You have been closely involved in the new Financial Stability Law which has recently been enacted by the Emir. What are the key objectives of the law and how will it work, especially with the troubled investment companies?

A: The new law, called the 'Enhancement of Financial Stability in the Country', has the following philosophical principles: it is a precautionary measure, it is a stimulative measure for the economy and it deals with solutions for the investment companies. In terms of precaution, we are ring-fencing the safety of the banking system. The banks are OK but if they have a problem we need to be there to solve it. In case a bank has a shortfall, the government can provide a full guarantee and the bank must pay back within a period not exceeding 15 years. And if government wants to participate in capital increase of the bank it can through mandatory convertible notes or preferred shares. This is the ring-fencing of the system.

As regards chapter two of the law, on activating the economy, the government will guarantee 50% of loans to the productive sectors of the economy; these must be paid back in five years. The government will provide a Kd4bn ($13.9bn) umbrella for 2009 and 2010, averaging Kd2bn a year. In case of default, it will guarantee 50% of the shortfalls after collaterals have been considered.

Chapter three deals with the investment companies, some of which are solvent but have liquidity problems. Only solvent companies will be entitled to benefit from the law and clearly banks will be extending loans.

Who will determine solvency? Major reputable institutions, such as investment banks, will be assigned to evaluate the financial position of the companies and decide whether they are solvent. We will tell the banks that if the companies are solvent they will be able to lend and the central bank will provide the 50% guarantee.

Also, we have provided something similar to a Chapter 11 law on bankruptcy, which we don't have in Kuwait. If an investment company needs restructuring it can apply to the court and the court can approach the central bank for its opinion and we will give an opinion on the restructuring process. Of the 100 investment companies, 33 are listed and about 40 are new and seem OK. We have advised the companies to think about consolidation but nothing has happened yet.

Q:This new financial law has been passed by Emiri decree but it must be introduced before the new parliament by the end of May (after the May 16 elections) to get final approval. Will it pass and what will happen if it does not?

A: It is up to the new parliament to decide. Under the constitution, such a decree can only be accepted or rejected, no amendments are possible. It is for the benefit of the country and the way it has been designed means it does not involve money from the government. The money comes from the banks and only if there is a default will public funds be made available.

Q:How do you perceive the future for the banking sector and the economy?

A: The central bank has encouraged the banks to take more provisions and they have taken more than is needed to be conservative. So far, the banking system is OK and, unlike other countries, we have only a financial crisis, not an economic crisis. I hope we can pass 2009 in a more prudent, stable way but I expect there will be a contraction of gross domestic product growth of 1% to 2% in Kuwait. On the budget, the reduction in capital investment expenditure is small but it would have been better to have a bigger capital expenditure as a stronger fiscal stimulus.

Q:How is Kuwait developing as a financial gateway to Iraq and does the state still have aspirations to be a financial hub for the region?

A: Kuwait's role as a gateway to Iraq depends on security. So far Kuwait has not been playing a major role in Iraq because of security issues, and how this changes in the future depends on Iraq. In order to be a financial hub, we need to have major economic reforms in the country; without these reforms it is not easy to be a financial centre. Also, our thinking is about becoming a specialised financial centre which would be complementary to others.

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