Kuwait: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
14 Jul 2005
eISBN:
9781451822335
Language:
English
Keywords:
ISCR; CR; Kuwait; GCC country; lending rate ceiling; ceiling; rate; GCC stock markets; B. stock market development; GCC market; Oman stock market; Market capitalization; Price indexes; Asset prices; Stocks
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This Selected Issues paper on Kuwait reviews its economic development strategy and uses a variety of analytical methods to highlight Kuwait’s policy challenges and their effectiveness. Kuwait has accumulated large fiscal surpluses, enabling it to build up a sizable asset position for future generations. The fiscal position is also expected to remain comfortable over the medium term, but the recent rapid increase in expenditures raises doubts about the sustainability of the current fiscal stance over the longer term.

Abstract

This Selected Issues paper on Kuwait reviews its economic development strategy and uses a variety of analytical methods to highlight Kuwait’s policy challenges and their effectiveness. Kuwait has accumulated large fiscal surpluses, enabling it to build up a sizable asset position for future generations. The fiscal position is also expected to remain comfortable over the medium term, but the recent rapid increase in expenditures raises doubts about the sustainability of the current fiscal stance over the longer term.

V. Kuwait and Other GCC Stock Markets: Recent Developments and some Efficiency Issues64

A. Introduction

117. The stock markets in Kuwait and the other GCC65 countries have witnessed large increases in stock price indices, market capitalizations, and trading volumes in recent years. New stocks have been continually listed on the Kuwait Stock Exchange (KSE) and the number of listed companies has risen from 86 at end-2000 to 125 by end-2004. Foreigners have been allowed to invest on the KSE-listed firms since 2000. As the GCC stock markets are becoming larger, they are witnessing larger capital inflows from investors seeking higher returns and a diversified global portfolio.

118. Given the importance of increasing non-oil private sector growth in the GCC countries, it is important that stock markets are well developed, efficient, and properly regulated for efficient mobilization and allocation of resources. A vibrant and efficient stock market would help in channeling saving to domestic investment, price discovery, privatization efforts, and providing opportunities to investing in the region.

119. In this paper we study the recent developments and the existence of calendar anomalies on the GCC stock markets. The stock market returns correlations among the GCC countries and the U.S. equity market (S&P 500 index) are also examined. Section B analyzes and presents data on stock market returns, market capitalization, and turnover in the GCC countries in recent years. The statistical properties of the stock market index returns in the GCC countries are examined and reported in Section C. Section D investigates the existence of calendar anomalies such as the day of the week effect and the month effect on the GCC stock markets to ascertain whether the markets are weak form efficient. This form of efficient markets implies that knowledge of the past price trends of stocks cannot be used to generate extraordinarily high returns. The existence of calendar anomalies would contradict the weak form efficient market hypothesis since predictable returns based on historical prices would provide opportunities for investors to generate abnormal returns. The conclusions of the paper are presented in Section E.

B. Stock Market Developments in the GCC Countries

120. Stock market capitalization in the GCC countries has almost quadrupled from a total of $129 billion at the end of March 2002 to $499 billion at the end of December 2004.66 This is a remarkable pace of growth. Consequently, stock market capitalization to GDP ratio has increased significantly over this period in all the GCC countries. This growth has been supported by sharply higher international oil prices (all GCC countries are oil exporters), improved corporate profitability, lower interest rates and comfortable liquidity in these economies as well as the relative reluctance of the GCC nationals to invest in overseas markets after the September 11 incident. The Average Oil Spot Price Index (APSPI)67 has more than doubled since 1995, and in fact, has almost quadrupled since its low reached in late 1998. This improvement in terms of trade has led to a sharp increase in nominal GDP in the GCC countries and has further spurred real economic activity in the oil and non-oil sectors. Because the GCC currencies are pegged to the U.S. dollar, interest rates have declined and remained low in recent years in line with U.S. interest rate developments. Meanwhile, credit to the private sector has shown a sharp rise in recent years, particularly in Saudi Arabia and Kuwait that boast the largest stock markets in the region in recent years. Further, Kuwait has also benefited from the change in the regime in neighboring Iraq that has reduced uncertainty of doing business in Kuwait, renewed trade relations with Iraq as well as generated a ‘feel-good factor’ in the domestic economy.

Figure V.1.
Figure V.1.

GCC Countries: Stock Market Capitalization 1/

(US$ billions)

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

Sources: Data provided by national authorities; and Fund staff estimate.1/ Quarterly data.
Figure V.2.
Figure V.2.

GCC Countries: Stock Market Capitalization to GDP Ratio

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

121. The sharp rise in market capitalization in the GCC countries in the new millennium reflects the growth in the stock market price indices. Except Kuwait, in all other GCC countries the increase in the stock price index is less than the increase in the market capitalization. In the case of Kuwait, while the Kuwait Stock Exchange (KSE) index increased by about 371 percent from end-2000 to end-2004, the market capitalization grew by 270 percent despite the increase in listed companies from 86 to 110 over the same period. The current KSE index is therefore showing larger gains in the value of the market than has been the actual increase in the value of the stocks. This is probably related to the fact that the KSE index is a price index and not a value-weighted index. In a price index, equal weight is given to the change in price of an individual stock of a firm included in the index irrespective of the firm’s market capitalization. The KSE may wish to consider constructing and publishing a more representative value-weighted stock market price index that would better reflect the gains on a buy and hold portfolio strategy for an investor.

Figure V.3:
Figure V.3:

Average Oil Spot Price Index

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

Figure V.4.
Figure V.4.

Kuwait and Saudi Arabia: Private Sector Credit Growth and Official Interest Rates

(Annual percentage change)

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

Figure V.5.
Figure V.5.

GCC Countries: Performance of Stock Price Indices Since 2000

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

122. The trading volumes in the GCC markets have also seen a surge since end-2000 with the turnover ratio (the ratio of value of stocks traded to market capitalization) rising significantly in all GCC stock markets during this period. The increase in turnover ratio in the GCC markets (particularly noticeable in the larger markets in Saudi Arabia and Kuwait) is a very welcome development since it is indicative of the increasing liquidity and rising investor interest in these markets. The increased stock market liquidity is important for the markets to channel savings for the development and growth of the non-oil private sector as well as for price discovery.

C. Descriptive Statistics of Stock Returns in the GCC Markets and their Correlation with the U.S. Market

123. The GCC daily and monthly stock market returns have a positive mean reflecting the increase in the stock prices during 1996–2004 while the variability of these returns, measured by the coefficient of variation, are relatively lower in the larger markets of Kuwait and Saudi Arabia (Tables V.1 and V.2).68,69 Mean daily and monthly returns on the Kuwait and Saudi Arabia markets were much higher than those experienced on the stock markets in Oman and Bahrain over the 1996–2004 period. For the period, 2002–04, the mean stock market returns were very high in Qatar and the U.A.E., and their variability was also lower. Mean monthly returns on the stock markets in the other GCC countries during this sub-period (2002–04) were positive and much higher than over the entire 1996–2004 period, with the larger markets in Kuwait and Saudi Arabia experiencing mean monthly returns of 3.6 percent and 3.8 percent, respectively.

Figure V.6.
Figure V.6.

GCC Countries: Trading Volume 1/

(In US$ billions)

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

Figure V.7.
Figure V.7.

GCC Countries: Turnover Ratio 1/

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

Table V.1:

Selected GCC Stock Markets:1

Descriptive Statistics of Daily Returns on Stock Market Indices (1996–2004)

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Daily returns are measured in percent.

Table V.2.

GCC Stock Markets: Descriptive Statistics of Monthly Returns on Stock Market Indices, (1996–2004)1,2

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Monthly returns are measured in percent.

Data for U.A.E. and Qatar are from 2002–04.

124. The stock markets in the GCC countries provide immense opportunities xfor global investors to benefit from the low correlation with the U.S. stock market. When the U.S. stock markets performed well from end-1995 to 2000, the stock market performance in GCC countries was relatively lackluster. Later on, when the U.S. stock market (as measured by the S&P 500 index) stagnated in the new millennium, the stock markets in the GCC countries witnessed extremely high returns. This view is further corroborated by looking at the correlations of monthly stock returns on the indices for some of the GCC markets (for which data are available from end-June 1995) and the S&P 500 index. While the GCC markets have a strong positive correlation among themselves the correlation with the S&P 500 index is low for most GCC countries. With a market capitalization of close to $500 billion, GCC markets provide an opportunity to investors for benefiting through portfolio diversification.

Figure V.8:
Figure V.8:

Performance of Stock Market Indices since 1995

Citation: IMF Staff Country Reports 2005, 234; 10.5089/9781451822335.002.A005

Table V.3:

Correlation of Monthly Stock Market Returns among GCC Countries and the U.S. Stock Market Indices, (1996–2004)

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D. Calendar Anomalies70

125. Many seasonals or anomalies have been reported in the literature for the U.S. and other stock markets. Cross (1973) and French (1980), using U.S. data, found that returns on Mondays were, on average, lower than returns on other days of the week. Jaffe and Westerfield (1985) found a day of the week effect on several foreign stock markets. Condoyianni et al. (1988) found that returns were negative on Mondays as well as Tuesdays for Australia, Japan, and Singapore. The Tuesday effect was stronger in these markets. This may have been because these markets tended to be strongly correlated with the U.S. market of the previous day. When the U.S. market opened, these markets were already closed for the day.

126. Keim (1983) found that stock returns, especially returns on small stocks, were on average higher in January than in other months in the U.S. market This anomaly of higher returns in January is known as the January effect. Gultekin and Gultekin (1983) also found the evidence of the January effect in other major international stock markets. The hypothesis of tax-loss based selling is often advocated to explain the January effect.

127. We find evidence of the day of the week effect in the stock market returns for Kuwait, Oman, Bahrain, and Saudi Arabia (Table V.4.) In Kuwait, the stock returns are positive and statistically significant on Mondays, Tuesdays and Saturdays. In Oman, the returns are positive and statistically significant on Saturdays during the period January 1996 to June 2000, when the stock market was closed on Thursdays and Fridays. For the period July 2000 to December 2004, when the stock markets were closed on Fridays and Saturdays, the returns are positive and statistically significant on Thursdays. In Bahrain, the daily returns are found to be positive and statistically significant on Wednesdays and Thursdays. In Saudi Arabia, stock returns are statistically significant and positive on Wednesday, Thursdays and Saturdays. The following regression was estimated to test for the day of the week effect:

R it = γ 1 d1t + γ 2 d2t + …… + γ 6 d6t + εt,

where Rit is the return on index i, and d’s represent dummy variables for each day of the week. In the event of the stock market being closed on a particular day (except over the weekend) in the period under consideration, the observation for the subsequent day is dropped from the sample.

Table V.4:

Selected GCC Countries: Regression Results for Day of the Week Effect 1/

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t-Statistics are in parenthesis.

Data used are from January 1996 to June 2000 when the Muscat Securities Market (MSM) was closed on Thursdays and Fridays.

Data used are for July 2000 to December 2004 when the MSM was closed on Fridays and Saturdays.

Coefficients marked with an asterisk are statistically significant at the 5 percent level.

128. We find evidence of the month of the year effect in the stock market returns for Kuwait, Bahrain and Saudi Arabia (Table V.5). In Kuwait, the stock returns are strongly positive and statistically significant in the months of April and May. The Oman stock market does not show any statistically significant abnormal returns in any particular month. In Bahrain, the monthly returns are found to be statistically significant and positive in the month of August and negative in the month of February. In Saudi Arabia, stock returns are statistically significant and positive in the months of April, July, and August. The following regression was estimated to test for the month of the year effect:

R it = γ 1 d1t + γ 2 d2t + …… + γ 12 d12t + εt,

where Rit is the return on the index i, and d’s represent dummy variables for each month of the year.

Table V.5:

Selected GCC Countries: Regression Results for Month of the Year Effect 1/

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t-Statistics are in parenthesis.

Data used are from 1996–2004.

Coefficients marked with an asterisk are statistically significant at the 5 percent level.

129. The presence of calendar anomalies on the GCC stock markets is indicative thatthese markets may not be weak form efficient. Further information and analysis is required to ascertain the reasons for the presence of these calendar anomalies. The study did not investigate the presence of a ‘Ramadan effect’ in these markets, since Ramadan does not coincide with any of the calendar months every year. The calendar effect in these countries is also unlikely to be explained by tax calendar issues (like the ‘January effect’ in industrial countries) since there is no personal income tax in the GCC countries.

E. Conclusions

130. The stock markets in GCC countries performed extremely well in the new millennium and the low correlation with the U.S. stock market offered global investors an opportunity to diversify their portfolio and reduce risks. The market capitalization and liquidity have risen sharply as also the interest of investors as indicated by the rising turnover ratio. The KSE may wish to consider constructing and publishing a more representative value-weighted stock market price index that would better reflect the gains on a buy and hold portfolio strategy for an investor.

131. The authorities need to continue to provide the necessary environment to develop the stock markets. Such support would help channel savings for the development of the non-oil private sector to create much needed growth and job opportunities. Efficient stock markets will also serve as institutions for price discovery to enable privatization of state enterprises at appropriate prices.

132. This study finds the presence of calendar anomalies on most GCC country stock markets that contravene the hypothesis of weak form efficiency. Further studies with more detailed data are needed to further explore the efficiency of the GCC stock markets as well as to explain the calendar anomalies found in this study. In this regard, the stock exchanges need to provide more detailed information to investors at minimal costs, including historical information. It is important that regulators ensure that the stock markets are efficient and if any inefficiency is reported, they should investigate the factors contributing to it. Greater awareness of the efficiency and regulation would enhance investor interest and further the development of these markets.

References

  • Condoyanni, L., J. O’Hanlon, and C.W.R. Ward, 1988, “Weekend Effects in Stock Markets: International Evidence,” in Stock Market Anomalies (Cambridge: Cambridge University Press).

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  • Cross, F., 1975, “The Behavior of Stock Prices on Fridays and Mondays,” Financial Analysts Journal (November–December) pp. 67–69.

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  • French, K., 1980, “Stock Returns and the Weekend Effect,” Journal of Financial Economics March, pp. 55–69.

  • Gultekin, M. N., and N. B. Gultekin, 1983, “Stock Market Seasonality: International Evidence,” Journal of Financial Economics (December).

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  • Jaffe, J., and R. Westerfield, 1985, The Weekend Effect in Common Stock Returns: International Evidence, Journal of Finance, Vol. 40, pp. 433–54.

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  • Keim, D. B., 1983, “Size-Related Anomalies and Stock Return Seasonality: Further Empirical Evidence, Journal of Financial Economics (March) pp. 13–32.

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STATISTICAL APPENDIX Kuwait: Basic Data

(Quota: SDR 1,381.10 million)

I. Social and Demographic Indicators, 2003

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II. Selected Economic Indicators, 1999–2004

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Sources: Data provided by the authorities; World Bank Social Indicators of Development; and Fund staff estimates.

For 2003, the discrepancy between the savings/investment balance and the current account balance is possibly due to the data being preliminary and may be resolved when the authorities revise the data.

Kuwaiti fiscal year ending March 31. The 2000/01 fiscal year was only 9-month, and the data were obtained by grossing up the 9-month data.

Since January 5, 2003, the exchange rate of the Kuwaiti dinar has been officially pegged to the U.S. dollar at 0.29963 KD/US$ (3.33745US$/KD) within a margin not exceeding 3.5 percent on both sides of this parity exchange rate.

For 2004, average for January to October.

Table 1.

Kuwait: Sectoral Origin of Gross Domestic Product at Current Prices, 1998–2003

(In millions of Kuwaiti dinars)

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Source: Ministry of Planning, Central Statistical Office.
Table 2.

Kuwait: Sectoral Origin of Gross Domestic Product at Constant 1995 Prices, 1998–2003

(In million of Kuwaiti dinars)

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Source: Ministry of Planning, Central Statistical Office.
Table 3.

Kuwait: Gross Domestic Expenditure at Current Market Prices, 1998–2003

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Source: Ministry of Planning, Central Statistical Office.

Includes government-owned enterprises.

Including re-exports.

Discrepancy between current account and S-I balance is due to differences in the compilation of national accounts and balance of payment statistics.

Table 4.

Kuwait: Gross Domestic Expenditure at Constant 1995 Prices, 1998–2003

(In millions of Kuwaiti dinars)

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Sources: Ministry of Planning, Central Statistical Office; and Fund staff estimates.

Includes government-owned enterprises.

Table 5.

Kuwait: Production and Disposal of Crude Oil and LPG, 1998–2003

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Sources: Ministry of Energy, Kuwait Petroleum Corporation, Central Bank of Kuwait, and Fund staff estimates.

Excludes bunkers and stocks.

Includes statistical discrepancy.

Average price of crude, LPG, and refined products.

Table 6.

Kuwait: Consumer Price Index, 1998–2003

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Source: Ministry of Planning, Central Statistical Office.
Table 7.

Kuwait: Wholesale Price Index, 1998–2003

(1980=100)

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Source: Ministry of Planning, Central Statistics Office.
Table 8.

Kuwait: Output of Major Industrial Products, 1997–2002

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Source: Ministry of Planning, Central Statistical Office.