Sunday, Sep 25, 2016

Dubai: Kuwait’s banking sector is expected to deliver robust performance amidst regional economic gloom from low energy and commodity prices, tightening liquidity resulting in lower growth on both assets and liabilities side of the balance sheet, according to banking sector analysts and economists.

Operating conditions for Kuwaiti banks are expected to remain supportive over the next 12 to 18 months as sustained levels of government spending, aided by vast reserves (estimated at around $600 billion (Dh2.2 trillion) as of June 2016) and relatively low debt levels, continue to drive growth in the non-oil economy.

Despite the drop in oil prices, Kuwait’s real GDP is expected to grow by 3 per cent year on year in 2016 as per latest IMF estimates, driven by higher oil production in 2016 (2.91 million barrels/day) as against 2015 (2.86 mb/d), which should in turn lead to an oil GDP growth of 2 per cent for the current year and non-oil GDP growth of 3 per cent.

“We expect an acceleration in real non-oil GDP [gross domestic product] growth in 2016 and 2017 to above 3 per cent from 1.3 per cent in 2015 as the investment programme continues to gain momentum. Project awards have remained strong in 2016, despite the lower oil price, and the pace of project implementation has picked up,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB).

Government spending is expected to maintain growth momentum and broadly support credit conditions, even as oil prices stay low. Analysts expect that capital spending will be maintained as a record amount of projects (including infrastructure, power, oil, healthcare and housing) are either currently planned or underway in Kuwait, providing new business opportunities for banks.

“Spending by the Kuwaiti government, even as oil prices stay low, will maintain growth momentum and support operating conditions for the country’s banks. Execution of the government’s new five-year development plan will drive new business for banks, while domestic consumption will remain strong, supporting our projections of 7 per cent credit growth,” said Alexios Philippides, Assistant Vice-President - Analyst at Moody’s.

Credit growth has gradually picked up since the second half of 2015, partly supported by the improved economic backdrop. System-wide loan growth strengthened to 7.2 per cent year on year in May 2016 from 5.2 per cent in June 2015.

System-wide credit growth is expected to be around 7-8 per cent level in 2016 before posting a measured rise to 8-9 per cent in 2017. A broadening of investment is an important assumption behind this increase. A greater role for private sector involvement in projects in areas such as health and construction, which will provide some support to credit growth. The deleveraging at non-bank financial institutions are expected to end in next 18 to 18 months which will provide further support to the headline number.

Fiscal reforms, such as the lifting of fuel subsidies and planned imposition of corporate and value-added taxation, will be implemented gradually over a long period and the government will continue to provide new employment opportunities to Kuwaitis, supporting consumption.

“Loan growth continues to be driven by the retail segment, which is seeing double-digit growth. We believe that this is providing support to private consumption, as public and private wage growth slows. The improvement in headline credit growth has also been due to the weaker y-o-y contraction in non-bank financial institution borrowing,” said Malik.

By Babu Das Augustine Banking Editor

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