Volume 5, Number 29 Money supply growth slows despite jump in credit on seasonal outflow of funds... Deposit rates continue to rise albeit at a slower pace
In its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that money supply (M2) growth slowed to a mere 0.2% in June, following several months of a relatively strong pace that added up to a 9.2% increase in the first half of 2005 (1H05). The slowdown in June took place despite continued strong growth in credit facilities and a rise in net foreign assets that have been the major factors behind the recent rise in liquidity. The reason appears to be an outflow of funds during the month related to the summer travel season, as well as a KD 200 million capital increase in June by Kuwait Finance House.
Monetary Highlights, June 2005
Credit growth accelerates
Credit rose strongly for a fourth consecutive month with the largest increase recorded in 17 months. Credit facilities to residents rose by KD 238 million to reach KD 10.7 billion. Growth since the start of the year stood at 8.2%, representing an annualized rate of 17%. The second quarter alone saw annualized growth in excess of 26%, the largest quarterly increase since 1Q04. Quarterly growth in credit reached a low during 4Q04 when it had fallen to a mere 4% per annum before rising to 8.7% in 1Q05. Despite the acceleration in growth during 2Q05, year-on-year growth remained at a more moderate 14%.
Credit growth during 4Q04 and 1Q05 was restricted as some banks sought to reduce their loan-to-deposit ratios below the 80% ceiling set by the CBK in mid-2004. As a result, the average ratio fell by end-2004 from a high of 92% in October 2004 to 89%, easing up notably to 82% by the end of May 2005. While part of this was due to strong growth in deposits and reduced credit growth, the reclassification of deposits by the CBK made the loan-to-deposit ratio less restrictive. In particular, deposits by the Savings and Credit Bank were reclassified as government deposits, instead of interbank deposits, and are included in the ratio's denominator. Following the strong growth in lending during 2Q05 the ratio climbed back up to 85% at the end of June.
Nearly half of June's growth in credit was in personal facilities which rose by KD 113 million. Of this, KD 53 million was in lending for the purchase of securities. Lending to the real estate sector rose by KD 89 million. Other sectors seeing positive growth were construction (KD 42 million), trade (KD 25 million) and industry (KD 21 million). Meanwhile, loans to non-bank financial institutions dropped significantly, falling by 10% (KD 90 million), though this sector maintained one of the highest year-on-year rates of growth at 22%.
Monetary Indicators, June 2005 (Year-on-year % growth)
Net foreign assets (NFAs) in the system rose by KD 97 million, reversing a decline of similar magnitude in the previous month. The reason for the increase was largely a reduction in local banks' foreign liabilities, mostly deposits of non-resident banks. This was partly offset by a KD 98 million decline in local banks' own deposits with non-resident banks, which saw its second month of decline.
Private sector deposit growth moderated further in June falling to 0.4%, the smallest increase in eight months. Most of the KD 49 million rise was in KD deposits, with FC deposits up by a mere KD 3 million. Despite the slowdown in June, private deposits managed to grow by 9.5% during 1H05, an average annualized rate of 20%, though most of this growth took place in 1Q05. Growth over the past 12 months was also strong at 15%.
KD sight deposits fell sharply following a large increase the previous month. Sight deposits fell by KD 163 million or 5.2%, partly reversing May's increase. This probably reflected the beginning of a seasonal outflow coinciding with the summer travel season. A larger rise, however, was seen in time deposits which were up by KD 214 million (4.0%) following two months of significant declines. Meanwhile, government deposits fell by KD 191 million, or 24%, following two months of increases totaling KD 220 million.
Liquid assets reverse part of last month's sharp increase
Despite the strong growth in credit, consolidated bank assets rose by a modest KD 53 million to reach KD 19.4 billion. Moderating the growth were declines in deposits with non-resident banks, Debt Purchase Bonds (KD 62 million), and liquid assets. Banks' cash and current balances with CBK fell notably in June, declining by KD 62 million (18%) following a sharp increase last month. Holdings of public debt instruments also fell by KD 23 million. The ratio of net liquid assets (cash, balances with CBK and holdings of public debt instruments) to total assets fell slightly from 14.6% to 14.3%, though it was still up from the start of the year when it stood at 13.4%.
Deposit rates continue to rise but at slower pace
Deposit rates continued to rise in June, though at a slower pace than the previous month. Prompted by the CBK, banks have been lifting rates on customer deposits, though the full impact on average cost of deposits has yet to show until all deposits are rolled over at the higher rates. Time deposit rates rose by 8-15 basis points (bps) for maturities of 1-12 months following increases of 63-70 bps in May. Still, the average rate paid on all customer deposits rose by only 2 bps in June following a 4 bps increase the month before.
Since the start of the year, rates paid on KD customer deposits have risen by 92-98 bps for various maturities, compared to a 50 bps increase in the CBK's benchmark discount rate. The discount rate remained unchanged at 5.25% in June. Compared to a year ago, rates have risen by 141-173 bps for maturities of 1-12 months. The 1-month average time deposit rate, which reached a low of 1.20% in June 2004, was up to 2.64% by the end of June.
Gap between KD and US dollar rates still below normal
Despite rising notably in 2Q05, KD customer deposit rates continued to lag increases in rates on US dollar deposits. The rate on 1-month KD deposits, which normally pays a 100 bps premium to its US dollar equivalent, was merely 9 bps higher by the end of June. The premium, which began to shrink in early 2004, turned negative at the start of this year reaching -56 bps by the end of March due to curbs on lending and limited tools to manage excess liquidity.
Excess liquidity caused KIBOR rates to diverge
The effect of excess liquidity was evident in the continued volatility in rates on local interbank deposits. The 1-month Kuwait interbank offer rate (KIBOR) dropped by 8 bps to 1.63% following an increase of 58 bps in May. Meanwhile, the 12-month KIBOR rose by 24 bps to 3.80%, double the 12 bps increase seen in May. The spread between the 1-month KIBOR and the discount rate rose from 354 bps to 362 bps, though it remained short of its peak 412 bps registered in April. The spread typically stays within an 80-110 basis point range.
-Ends-
For more information please contact:
Sana M. Lababidi
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PR World Wide In Middle East and North Africa
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Dubai
United Arab Emirates
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© Press Release 2005
