Kuwait credit growth improves in Q3; corporate borrowing rising

KUWAIT - Credit growth improved in 3Q18 despite seasonal softness, ending September at 2.1 percent, supported by both a pick-up in business and household lending, while credit to non-financial companies continued to decline.

Deposit growth, on the other hand, eased to 4.9 percent in Q3 on KD sight and savings deposit outflows that coincided with the travel season. As for interest rates, the CBK left its policy rate unchanged after the Fed’s September rate hike, but increased the repo rate by 25 bps and so did banks on their deposit rates.

Business lending growth rose to 2.0 percent y/y in September from 1.0 percent in June, thanks to a pick-up in borrowing by key sectors, such as industry and construction, as well as other non-specified categories – its second consecutive quarterly improvement. Business confidence was supported by an environment of higher oil prices, which may have helped restore the appetite for credit in that segment. The subsequent fall in oil prices in October and November may since have impacted this trend.

Growth in borrowing by households, however, softened slightly to 6.3 percent in September from 6.7 percent in June, as weaker consumer borrowing – in the form of medium-term loans and/or credit cards – weighed on healthy housing loan demand.

In a bid to catalyze the former, the central bank of Kuwait has relaxed some of its lending restrictions, reflecting recent economic developments. Borrowers seeking non-housing loans can now borrow up to 25 times their salary or a maximum of KD 25,000, up from 15 times or maximum of KD 15,000. The central bank will also now only require proof of purchase documents for housing-related loans, while no such documents will be required for non-housing borrowing.

Meanwhile, the pace of deleveraging by non-bank financial firms picked-up in September to 14.8 percent y/y from 9.9 percent in June, with no borrowing by that segment over the quarter. Credit extended to the investment sector is down KD 188 million year-to-date.

Growth in private deposits eased to 4.9 percent y/y in September from 5.7 percent in June, on withdrawals from KD sight and savings deposits that coincided with the summer travel season. As such, the expansion in the money supply stood at 4.8 percent, down from 5.3 percent in June. Meanwhile, the contraction in government deposit growth worsened to 8.9 percent in September from 0 percent in June, despite higher oil prices.

Bank reserves (cash, deposits with the CBK, and CBK bonds) were down a small KD 57 million to KD 6.0 billion or 9.2 percent of bank assets in 3Q18. The pick-up in lending helped banks make good use of the KD 450 million in public debt that matured over the quarter. The new public debt law has yet to be approved by parliament.

Commercial lending rates were unchanged last quarter, while deposit and interbank rates increased alongside hikes in the domestic repo rate. The Central Bank of Kuwait forewent an increase in its main policy rate – the discount rate used to price loans – after the US Fed hiked its target rate by 25 bps for the third time this year in September.

The CBK has skipped four out of the last eight US Fed hikes, a slower pace of rate increases aimed at supporting economic growth. To maintain the attractiveness of the Kuwaiti dinar and stem potential outflows, however, the CBK increased by 25 bps its repo-rate, with banks following with a similar increase on their deposits. On average, rates for commercial deposits maturing between 1 and 12 months were each up 16 bps over 3Q18. Meanwhile, lingering liquidity in the system capped the rise in the offered 3-month interbank rate at 3bps.

Credit is projected to finish the year up 4 percent, supported by capital spending and moderate economic growth. The Fed is almost certain to hike its target rate for a fourth time this year in December. The impact of this move on domestic interest rates is not clear at this time depending on the CBK’s assessment of credit and liquidity conditions and economic growth more generally.

Even if the CBK decides to raise its policy rate for a second time in 2018, this should not in principle have a noticeable dampening impact on borrowing as looser borrowing restrictions and an unwinding in base effects that have weighed on loan growth this year should see credit growth improve in 2019.

NBK ECONOMIC REPORT