Lending Some Support
In the 2015-16 edition of the World Economic Forum’s (WEF) Global Competitiveness Report, Kuwait was ranked the 34th most competitive country in the world, ahead of fellow GCC states Bahrain and Oman. The most comprehensive and authoritative report of its kind, the WEF uses its proprietary Global Competitiveness Index (GCI) to asses the competitive landscape of 140 economies across the globe and give insight into the forces that shape national economies. A key factor in Kuwait’s jump from number 40 in the 2014-15 report is the WEF’s evaluation of its consistently healthy macroeconomic environment (deemed the third best in the world) where the country ranks number one and two in terms of government budget balance to GDP ratio (25.5%) and gross national savings to GDP ratio (51.9%), respectively. Among areas limiting the competitiveness of the country, however, Kuwait was ranked a disappointing 73rd in the measure of its financial market development, shedding light on the fact that despite a history of strong performance, there is still a need for improvement to the country’s now struggling financial sector. The measure of a country’s financial market development in the Global Competitiveness Report takes into account factors of efficiency—availability of financial services, domestic credit provided to the private sector, financing of SMEs, venture capital availability, bank overhead costs, depth of credit information indices, financing through local equity markets, market capitalization of listed companies, money supply, soundness of banks, non-performing loans, bank z-scores, regulation of securities exchanges, and stock price.
The Kuwaiti government’s recent $116 billion 2015-19 five-year strategic development plan is aimed at investing in the country’s infrastructure and using the public-private partnership (PPP) framework to push the role of the private sector toward contributing upwards of 40% annual GDP, compared to its current contribution of 26.4%. The strategy is also aimed at diversifying the economy away from its current dependence on traditional hydrocarbon revenues, which at 56.2% of GDP in 2015 makes Kuwait the most oil-dependent country in the region. Recent downward volatility in the price of oil and decisions by OPEC to maintain current output levels have rendered it necessary for the country’s leaders to architect the fate of its economic future and to do so promptly. National savings and existing petroleum reserves give Kuwait the resources needed to transform its economic structures into a more sustainable productive system moving forward; what remains to be seen is to what extent the necessary ingenuity and access to capital markets will be available to facilitate such a drastic transition.
LAY OF THE LAND
The financial sector of Kuwait is noted as being one of the oldest and thus most developed in the region. The National Bank of Kuwait (NBK) was incorporated in 1952 as both the first local bank as well as the first company in the Gulf region to issue public ownership shares. In the following decades, stock trading was only loosely regulated until the establishment of the Kuwait Stock Exchange (KSE) in 1983. The market capitalization of the KSE has consistently ranked as one of the largest among securities exchanges in the Arab region, with a total of more than 200 listed companies valued at a total of over $100 billion. With a historical market cap measuring approximately 100% of GDP, the depth of the securities market in Kuwait has led to a reputation for relatively consistent market performance compared to the rest of the MENA region. However, declines in the liquidity of the country’s capital markets in the wake of the 2008 financial crisis have seen Kuwait fall behind its GCC neighbors in the capacity of its capital markets to support new economic growth and many of the most profitable listings on the KSE carry a beta that exceeds the risk tolerance of now-weary investors. The KSE has seen a decline in liquidity in excess of 80% in the last ten years, making Kuwait just the fourth most liquid market for capital in the region where it was at one time ranked second by the same measure.
Many analysts point to market inefficiencies and ineffective regulation in Kuwait’s securities market as the likely culprit for holding back the country’s explosive potential to move from its current place among MSCI’s frontier markets to an emerging market. As a major step toward carrying out necessary reforms of the country’s financial institutions, the National Assembly voted in 2010 to establish the Capital Markets Authority (CMA). The implementation of the CMA as an independent regulator can not be underestimated in its impact on improving financial efficiency and international competitiveness for a capital market that ranked just 85th in the GCI’s measure of the regulations of securities exchanges, 81st in the strength of auditing and reporting standards, and 134th in the efficacy of corporate boards. The CMA is tasked with regulating a KSE that had for the 30 years prior to 2010 been overseen by the Market Committee, which was headed by the Minister of Trade and Commerce. In contrast to the regulatory environment that it inherited—one which clearly did not reflect global best practices in market oversight or governance—the CMA has amended 65 of the original 164 articles dictating policy for Kuwait’s securities markets in an effort to enhance regulatory compliance and is quickly building a case for gaining admission into the International Organization of Securities Commissions (IOSCO).
Government attempts to bring the Kuwaiti financial markets more in line with international standards of operation and increase competitiveness are evident in the move towards privatization in many sectors, including the Kuwaiti Stock Exchange itself. The Boursa Kuwait Securities Company (BKSC) was founded in April 2014 by the CMA to act as the future owner and operator of the privatized Kuwait Stock Exchange. With initial authorized capital of KWD60 million ($198.5 million), the BKSC is carrying out a 46-step strategic transformation plan in an effort to improve the exchange’s performance and develop Kuwait into a leading regional capital market. In support of these visionary changes to the capital markets of Kuwait, a legislative decision was reached in 2015 to establish the ownership distribution structure for the upcoming IPO of the KSE. Under the new ownership guidelines, 50% of the bourse’s shares will be offered to Kuwaiti citizens, 6-24% will be split between government entities, and 26-44% will be allocated to international operators. These decisions are not without a substantial historical basis, such as the privatization of the Dubai Financial Market (DFM). After being transformed into a public joint stock company in 2005, liquidity levels increased from 12.69% to 158.5% in 2007, and market capitalization increased from $86.9 billion to $138.2 billion in 2006. Following the evaporations of Kuwait’s liquidity in the wake of the global financial crisis, it is this kind of financial makeover that government officials are hoping will usher in a new era of its economic identity.
DESIGNED FOR SUCCESS
New changes in fiscal policy in the money markets are being carried out primarily by the Central Bank of Kuwait (CBK). Established in 1968 as a replacement for the Kuwaiti Currency Board, which had operated since 1960 in the narrow capacity of strictly issuing currency, the CBK is tasked with maintaining financial stability throughout the country’s financial system by monitoring bank liquidity, institutional credit levels, and implementing prudential regulation. The upholding of stipulations regarding the make-up of its board of directors—composed not only of the head of the CBK, but also a representative from the Ministry of Finance, a representative from the Ministry of Commerce and Industry, and four other external members has long been one of the shining lights in Kuwait’s regulatory environment. The new Basel III guidelines will be fully implemented in Kuwait by December 2016 (as opposed to the international January 2019 deadline) and the Central Bank already maintains a stringent minimum capital requirement 2.5% higher than outlined in the new international standard.
With a total value of just $3.5 million traded on the KSE in 2Q2015, historical data would suggest a conservative short-term outlook for the capital markets of Kuwait. However, in light of restructuring throughout the financial sector, new government action plans, and prudential monetary policy to the tune of a 92.5% Tier 1 capital ratio in the banking sector and a nationwide regulatory liquidity ratio of 34.1, new life for Kuwait’s capital markets seems to be close at hand with renewed economic growth coming along with it.
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