Standard and Poor (2016) Research Update: Kuwait Ratings Affirmed at ‘AA/A-1+’ Despite Lower Oil Price Assumptions; Outlook Stable, February 12, 2016.
Prepared by Inutu Lukonga.
The private sector derives a large share of their business from government contracts and the government also accounts for more than 45 percent of employment in Kuwait.
The Kuwait Stock exchange index which had declined by 13 percent between December 2008 and June 2014 declined further by another 22 percent through September 2016.
Kuwait is pegged to a basket of currencies and has maintained the peg. Policy rates in Kuwait have been largely correlated with US rates.
The decline in lending to the real estate and households is largely attributed to the enforcement of the regulation that requires borrowers to provide proof of deployment of credit for the purpose for which it was approved for and weakening consumer confidence.
The CBK also increased its Discount Rate (CBDR) by 25 basis points to 2.25 percent. The increase in policy rates pushed up the average interest rate on loans of commercial banks, after calculating the margins above the discount rate allowed by CBK of 3 percent for customer loans and 4 percent for commercial lending, to be between 5.25-6.25 percent.
The moderate scenario assumed declines in non-oil GDP of -4.7, equity price drop of -22.6 and a real estate price drop of -20 percent. The severe shock simulated a fall in nonoil GDP of -8 percent, equity prices, at about -58.7 percent, and real estate (investment) price drop of 30 percent.
The stress results for the risk from the real estate, however, do not provide a complete picture to the extent that it does not take into account potential losses from real estate collateral or investments in the sector, particularly for the Islamic banks.
The main objective of the Liquidity Coverage Ratio (LCR) is to promote the short-term resilience of the liquidity risk profile of banks by ensuring that they have sufficient level of high-quality liquid assets (HQLA) to survive a significant stress scenario lasting for a period of up to 30 days.
Islamic banks are allowed to invest in fixed property while conventional banks are not and the presence of subsidiaries that are outside the regulatory perimeter presents an important challenge.