32 minute read
MARKETS
from #228 March 2020
UAE banking at a time of inflection
In the current market landscape, with its challenges in connection with difficult macro conditions, growing gap between leaders and laggards, and the threat from platform businesses, many banks need to do something. Dr Gokhan Ozevin, Senior Principal in the Financial Institutions Practise of Kearney says that difficult macro conditions should not be an excuse to only focus on short-term measures
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UAE—AN ATTRACTIVE BANKING MARKET WITH UNIQUE CHARACTERISTICS M ost banking markets around the world have seen limited growth and profitability improvement in recent years. In contrast, despite the recent economic slowdown, UAE has been an attractive market from a growth and profitability standpoint and remains so. UAE banking income grew at a CAGR of five per cent between 2014 and 2018. Average annual RoE over the same period was 13 per cent.
UAE banking is characterised by relatively higher risk costs and lower leverage which are offset by a high degree of cost efficiency and somewhat higher margins. Share staff costs in total costs remains very high.
Corporate and GREs account for an unusually high share (approximately 70 per cent) of deposits and loans in the system, in line with the structure of the economy and concentration of income. Corporate loans, reflecting composition of the GDP, are
BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228 dominated by real estate and trade, with increasing yet limited diversification into manufacturing, transport and oil and gas. Deposits generate the lion’s share of risk-adjusted net interest income due to high risk costs associated with lending; high competitive pressure, negatively impacting pricing, and high share of current account and savings account in the deposit mix. Wining primary relationships in retail and transaction banking business in corporate are key for sustained profitability.
COMPETITIVE DYNAMICS CHANGING RAPIDLY Competitive dynamics is changing rapidly in the UAE market— top-end of the market has become much more concentrated after the major mergers over the past couple of years. While First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, together account for more than 75 per cent of assets, rest of the market remains fragmented and overbanked—five banks with asset market shares between 2-7.5 per cent and 11 banks with less than two per cent.
Growing pressure on mid-and small-size banks Impact of scale on performance becomes very visible the market is separated into three tiers based on asset market shares (Tier 1: > 5 per cent, Tier 2: 2-5 per cent, and Tier 3: <2 per cent asset market share in 2013).
Although Tier-2 and Tier-3 banks managed to maintain their market shares so far, we observe a sizable profitability gap between Tier-1 banks and the rest. While Tier-1 banks delivered positive economic value added from 2013 to 2018, Tier-2 and Tier-3 banks struggled to pay back their cost of equity. Scale clearly matters, and gaps in digital as well as foundational capabilities contribute further to this profitability gap. We observe lesser productivity with Tier-2’s, and lesser productivity and lower risk-adjusted margins with Tier-3 banks.
Gaps in scale, digital and foundational capabilities are likely to start a problematic competitive cycle for Tier-2 and Tier-3 banks. Investment pools required for customer innovation will be inadequate. Customer may accelerate defection to competitors with stronger balances sheets, more convenient and innovative offerings. In the absence of competitive value propositions, acquisition and retention levers may default to aggressive pricing and additional risk taking.
COMPARISON OF PROFITABILITY DRIVERS ACROSS BANK TIER
14.1% 10.8% 8.1%
Tier 1 Tier 2 Tier 3 Net Profit / Assets 1.9% 1.6%
1.1%
Assets / Equity 7.5% 7.0% 7.4%
Tier 1 Tier 2 Tier 3
Source: Kearney
Opr. Income / Assets 3.2% 4.5%
3.4%
Opr. Costs / Assets
0.9% 2.0% 1.4%
Opr. Costs / Assets
0.3% Tier 1 Tier 2 Tier 3 0.8% 0.8% Interest Income / Assets 3.7% 4.3% 4.1%
% Interest Expenses / Assets
1.4% 1.2% 1.8%
Net F&C Income / Assets
0.9% 1.4% 1.1%
Staff Costs / Opr. Costs 60% 67% 63%
Tier 1 Tier 2 Tier 3
Leading indicators and technology trends pointing towards tougher times Despite the unsupportive macro environment, profitability of UAE banks has remained broadly intact so far thanks to rising interest rates, cost-cutting efforts and financial buffers. Decelerating loan and deposit growth, tightening margins, accelerating NPL formation ratio are pointing towards tougher times. In addition to the bleak macro background, shifts in habits and preferences of customers, ongoing structural changes with the rise of fintech, open banking, and entrance of ‘platform’ businesses continue prompting a fundamental transformation of banks' operating models.
COST OPTIMISATION IS NECESSARY, BUT NOT ENOUGH Commitment to efficiency and productivity gains Rigorous cost management, more selective definition of target segments and focusing business models accordingly are necessary for Tier-2 and Tier-3 banks. In addition to traditional cost optimization techniques, cost savings can be also achieved through cross-industry multi-bank efforts such as shared infrastructure, industry-wide utilities, smart outsourcing and strategic distribution partnerships. In many developed and emerging markets, non-strategic assets and activities such as ATM infrastructure and network management, call centres, KYC processes, payments processing etc. are being shared. Large banks or bank coalitions can position themselves as service providers/utility centres, selling their services to smaller banks, increasing their economies of scale. Another common route to efficiency is partnerships with companies from other industries and large digital and e-commerce platforms.
Sharper customer segment and experience focus Smaller players should focus on (sub-) segments which are most attractive and where they are most able to compete and reduce commitments to noncore businesses to reduce organisational complexity and costs. There is a wide gap between leaders and laggards in UAE banking in terms of customer experience quality. Banks should aim to leverage this customer experience gap to their competitive advantage. Not all the advocacy drivers have the same impact for each bank. Identifying a bank’s unique formula for superior client experience given its competitive positioning in the market is key. Revenue and margin growth Successful growth starts with reaching full potential in the core business and there are many levers to this end. When a bank has little competitive advantage and generating returns below the cost of capital, it would be more appropriate to focus on profit improvement with little growth or investment, shrinking the business to more attractive segments/products/channels.
The chosen strategic intent should be supported by action across four essential enablers: value-based digital transformation, better analytics, agile ways working, and right talent and HR strategies. Regardless of their chosen strategy, firm foundational capabilities such as digital-ready IT, robust capital management and risk processes are key for UAE banks.
FOUR ESSENTIAL TRANSFORMATIONAL ENABLERS Digitise intelligently or die Digital has the potential to enable stronger growth and lower costs. Digital fuels growth by allowing banks to create new products and propositions and do this much faster. It also improves customer acquisition and retention by enabling an integrated multichannel offering that deepens customer engagement, intelligent sales and service processes where RMs can take advantage of advanced analytics tools. Banks can extend their customer reach and distribution capacity, either partnering with online/offline players or positioning themselves as the hub of an ecosystem.
On the cost side, digital allows banks to decrease cost of their customer sales and service interactions without sacrificing their richness. Furthermore, through digitising
POTENTIAL STRATEGIC LEVERS TO DRIVE SUSTAINABLE PROFITABILITY
Efficiency & productivity
–Zero-based cost optimisation for a step change in the cost base –Shared infrastructure, utilities, outsourcing, and strategic partnerships –Adding scale through inorganic growth –Digitizing and automating repetitive, rule-based processes –STP, RPA –AI-based apps to automate judgementbased tasks, e.g.: –Analysis of corporate financials –Retail credit underwriting –Customer service – Accelerate move to digital distribution –Branch/ATM network and formatoptimization Customer focus Revenue/margin growth
–Trimming non-core businesses –Superior customer experience across retail, SME and corporate businesses –Identify and focus on select high-impact advocacy drivers –Digitize the CX transforming transaction and banking journeys –Simplify onboarding and servicing with STP and automation –Centralize data collection across products to enable sale of multiple products –Personalize customer solutions leveraging behavioral data –Digitally enable RMs –Streamline client coverage byseamless teaming across RMs, product and delivery teams –Real-time analytics-drive n CX management –Portfolio and pricing optimization –Boosting F&CI through pricing, sale s force discipline, and analytical levers –Increasing sales force effectiveness adopting best practices across the sales operating model –A renewed focus on Corporate Transaction Banking and Bancassurance –Holistic approach to effective acquisition of salary customers –Dominating payments to protect and grow customer intimacy –Expansion into digitally underserve d segments –International expansion
Source: Kearney
and automating many time-consuming manual, non-STP processes they can reduce their reliance on branches, radically transform their CX, and take out a lot of cost.
Using data and analytics to boost performance With the demand for faster information and decision making higher than ever, a progressive data strategy that effectively collects, integrates and manages data across the large numbers of customer touchpoints so that it can be acted on; adopting advanced analytics (big data analytics, AI/ML algorithms) and embedding them into operational workflows is both a key imperative and a low hanging fruit.
Agile ways of working Leading banks in the UAE are adopting agile ways of working to tear down functional silos and cut down time to market of new products and services. Many have established digital factories, with the aim of accelerating transformation and eventually spreading the factory’s agile culture back to the larger organisation. Scaling agile to projects with dozens of teams working on complex products over multi-year horizons presents a serious challenge to incumbents and require a careful redesign of the operating model.
Talent strategy for digital shift To manage the transition to digital and data driven era, banks need to align recruiting and digital strategy, adapt performance management and recognition processes, rethink career tracks and flatten organisational models. They need to reinvent their talent strategies to attract, train and keep quality digital talent.
STRONG FOUNDATIONAL CAPABILITIES: DIGITAL-READY IT, ROBUST CAPITAL AND RISK MANAGEMENT Banks that are serious about digital transformation will need to enhance their enterprise IT landscape along three
Kearney XX/ID
critical dimensions. Firstly, banks need to simplify their application and infrastructure architectures and decouple their application landscapes. Second, banks need to revamp their data management practises and provide a digital-ready data infrastructure. Third, banks need to adopt continuousdelivery and DevOps to automate their delivery processes to reduce time to market and increase development quality.
Overall bank value metrics— EVA, RWA, etc.— must be consistently broken down across divisions and value creation targets should be integrated into target agreements for all business unit heads and must be regularly monitored.
UAE banks must continue enhancing their ability to manage risk, considering new opportunities emanating from data, analytics and digital tools as well as emerging new risk types. There is ample room in the market to further automate credit underwriting processes and workflows and use advanced analytics techniques (e.g. ML/AI, ensemble models) to improve the accuracy and consistency of risk models.
WHERE DOES ALL THIS LEAVE BANKS? Further consolidation may be only part of the answer. Banks need to think in terms of transformation rather tactical measures, have a comprehensive strategy and executive alignment to deal with the issues in front of them and meet the future of the industry. This means seeking a sustainable business model, embracing a stronger customer focus, and intelligently investing in digital.
UAE banks need to find ways to collaborate within the industry, firstly, to achieve a more efficient operating models, but more importantly, to effectively compete against nonbanks that are making inroads into financial services. At this inflection point for the industry, those willing to be make bold decisions and take decisive action are likely to emerge as winners. It is important to remember that 'in the middle of difficulty lies opportunity'.
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“WE ARE EXCITED FOR OUR NEXT PHASE OF GROWTH IN 2020 AND HAVE ENTERED THE YEAR IN A STRONG OPERATING AND FINANCIAL POSITION WITH FULL CONFIDENCE FROM THE MARKET FOLLOWING THE SUCCESSFUL SUKUK ISSUANCE. THE SUKUK REPRESENTS A STAMP OF APPROVAL FROM REGIONAL AND INTERNATIONAL INVESTORS, AND IS AN ENDORSEMENT OF GFH’s SUCCESS AND MARKET POSITION.”
— Hisham Alrayes
A solid market position
GFH Financial Group’s landmark $300 million five-year Sukuk issuance was 2.5 times oversubscribed, with a book size exceeding $750 million. The successful issuance is a stamp of approval from regional and international investors on the Groups profile, strategy and dominant market position. Hisham Alrayes, CEO and Board Member of GFH, sits down with Banker Middle East to talk about this success and his plans for the year
GFH Financial Group (GFH) successfully priced a $300 million five-year Sukuk in January. Dubbed to be a landmark transaction for the financial institution, placing it in the international debt capital market, the issuance was well-received garnering a strong demand from international investors.
SUKUK AUCTION The orderbook for the certificates saw an oversubscription of 2.5 times with a book size exceeding $750 million. International investors outside the region took up 47 per cent of the issuance, while the remaining 53 per cent was allocated to regional investors. In terms of the types of investors, 61 per cent were fund managers and 39 per cent were financial institutions.
“While the issuance was met with strong market interest from both international and regional investors, it reinforces market confidence in our business and strategy,” said Hisham Alrayes, CEO of GFH.
GFH Financial Group is a diversified business group with four business lines. This allows debt investors to invest in a company that is well diversified and hence not exposed to cyclical market factors of institutions with one business line, added Alrayes.
The Sukuk was supported by a 'B' rating from both S&P and Fitch, which recognises GFH's healthy financial position, sound strategy and business model.
The proceeds of the Sukuk issuance will be used to enhance the financial position of the group and to fund its next phase of growth.
FUTURE PLANS GFH reported a total income of $335 million and a net profit of $80 million attributed to shareholders for 2019. Funds raised reached $2 billion in the equity and money market, a 100 per cent increase from 2018. The financial institution concluded six transactions at a total deal value of $557 million across the UK, US and GCC markets. Total assets of the group was recorded at $5.9 billion on 31 December 2019, compared to $5 billion in the previous year, reporting an increase of 18.2 per cent. Total assets and funds under management increased from $ 8.5 billion in 2018 to $10 billion in 2019.
GFH’s revenue for 2019 was $335.69 million compared to $286.17 million last year, boasting an increase of 17.3 per cent. The financial institution attributed this to the continued growth and progress in GFH's core investment banking business, increased contributions from real estate activities and strong performance in the group’s growing treasury business.
GFH is listed on the Bahrain Bourse, Kuwait Stock Exchange and Dubai Financial Market under the ticker “GFH”.
Alrayes further expanded on the Group’s operating performance during the year. “We have achieved a good growth and results from across our core business lines characterised the Group’s performance in 2019. Key among these was continued growth of our portfolio of real estate assets in the US market where we have now concluded investments in excess of $1 billion over the past five years. Our newly established treasury line also exceeded expectations supporting income growth and adding further diversification to our business. These key areas of our business that we will be working to further diversify and grow in 2020.”
A POSITIVE TRAJECTORY Over the course of 2019, GFH continued to build its core business lines whilst diversifying in line with its mandate. The financial institution managed to significantly expand its investment banking business closing six transactions which are valued at $557 million in assets under management.
Similarly, GFH witnessed substantial progress in its real estate activities, landmark projects, commencing sales in landmark developments as well as securing profitable and well-timed exits. Additionally, the Group's newly launched treasury business line performed extremely well and contributed to strong and improved income generation.
Commenting on GFH’s progress, Alrayes said, “The progress of the past year has seen us emerge into 2020 with even stronger foundations upon which we will further build the business and advance our strategy to be a leading regional and international investor. As we pursue this mission and expand our international presence, GFH’s entrance into the international debt capital market with our recently issued Sukuk will further positively position our brand globally.”
“Through the Sukuk, a greater number of international investors have now already been exposed to GFH and our business activities. We intend to capitalise on the recognition received as we go forward. Furthermore, GFH’s access to the international debt capital market has also served to diversify GFH’s funding sources, further strengthening the Group’s financial position and better allowing us to continue to source, execute and market unique, attractive investments and opportunities for shareholders and investors,” he added.
— Hisham Alrayes
Hisham Alrayes, CEO and Board Memebr, GFH Financial Group
GFH FINANCIAL GROUP $300 MILLION FIVE-YEAR SUKUK
Issuer Obligor Size of Issue Profit Tenor Currency Global Coordinators
Joint Lead Managers
Legal Advisors for Issuer Listing Governing Law Rating Investor Breakdown Book Size Face value/Minimum Investment GFH Sukuk Company GFH Financial Group $300 million 7.50 per cent 5 Years US dollar Societe Generale and Standard Chartered Emirates NBD Capital, Kamco Investment Company, Mashreqbank, SHUAA Capital, Societe Generale, Standard Chartered Bank and Warba Bank Allen & Overy / Zu’bi & Partners London Stock Exchange English Law Rated B, with a stable outlook, by Fitch and S&P 47 per cent International, 53 per cent regional More than $750 million / 2.5 times oversubscribed $200,000
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Fashionably late
Kuwait's massive reserve has always allowed its economy to absorb geopolitical risks and oil price volatility. However, these macroeconomic shocks have finally given the government a nudge to implement long-overdue reforms to diversify the country's sources of revenue. We take a look at this wealthy nation's agendas
Despite the strain on Kuwait’s finances, the country’s wealth still sets it apart. According to the International Monetary Fund (IMF)— boosted annually by mandatory transfers of 10 per cent of total revenue to the Future Generations Fund (FGF)—assets in the Kuwait sovereign wealth fund has amounted to over $400 billion. Kuwait, OPEC's fourth-largest oil producer, has been the slowest reformer in the GCC, partly due to government-legislator frictions and exceptionally large sovereign assets, which could finance decades’ worth of fiscal deficits.
According to S&P Global, despite Kuwait's baby steps towards fiscal reforms, the economy remains tightly bound to oil. The country derives around 55 per cent of its GDP, more than 90 per cent of exports, and about 90 per cent of fiscal receipts from hydrocarbon products. Global oil prices will continue to determine growth, but other economic sectors are picking up. In 2019, Kuwait recorded a three per cent non-oil revenue growth and the IMF projected a 3.5 per cent growth this year.
Kuwait approved its 2020/21 budget last month projecting a KWD 9.2 billion ($30 billion) deficit, another huge deficit for the sixth year in a row due to lower oil prices and production curbs in line with the country’s commitment to the Organisation of Petroleum Exporting Countries (OPEC).
The parliament has delayed the passing of a new debt law after the previous one expired in October 2017, blocking any debt issuance in 2018 and 2019. The tensions delaying Kuwait’s fiscal reforms have stalled the country’s economic transformation efforts. Lawmakers have resisted efforts by the government to reclaim access to debt, accusing it of mismanaging public finances and demanding a fix before it can borrow again, said Moody’s.
Fitch Ratings stated that government resignations and subsequent cabinet reshuffles point to political frictions that could delay new debt issuance and weigh on broader fiscal and economic reforms.
However, despite the tumultuous relationship between the government and politicians, Kuwait introduced financial and structural reforms to boost private sector growth and employment. The World Bank stated that Kuwait is undertaking reforms to improve the business climate, strengthen competition, reduce the role of the state in the economy, deepen capital markets, and foster the development of SMEs.
THE ECONOMICS OF KUWAIT VISION 2035 When the Emir of Kuwait opened the parliamentary session last year, he urged lawmakers not to allow higher oil prices to hold back economic reforms needed to protect future generations.
For years Kuwait benefited from having the third-largest oil reserves in the world by investing in lucrative oil discovery projects. Now the government is eager to capitalise on human capital.
Kuwait is taking bold steps towards a bright future with Kuwait Vision 2035 that is aimed at bolstering the country’s financial status to include a variety of income resources other than oil revenues.
The government plans to privatise around 40 assets over the next 25 years. By privatising national assets, Kuwait is handing the private sector a stake in the country’s future.
The Kuwait Vision 2035 was launched by HH the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah some two years ago to transform the country into an international hub for business and commerce. Its ultimate aim is to wean the country off from dependence on hydrocarbons, cut the red tape that hurts innovation, trim Kuwait’s massive public sector spending and spur private sector investment.
— S&P Global Ratings
The Financial Times reported that the government’s grandiose infrastructural spending plans, alongside wideranging investment in energy, healthcare and education feed into the country’s long-term development vision.
In 2019, the finance ministry said that $60 billion has already been injected into the economy as part of the reform plan, with another $100 billion set to be deployed through 2035. According to ProTenders, a Middle East construction market research company, there are $429 billion in planned projects in Kuwait, of which $239 billion in contracts are under construction.
Kuwait’s Mubarak al-Kabeer port is the centrepiece of the country’s development plans. Located on Bubiyan Island near Kuwait’s northern border with Iraq, the Silk City project is planned as a free-trade zone.
Backed by China, the North Gulf Gateway project is designed to attract a range of high-tech industries and tourism, and create between 200,000 and 400,000 new jobs. The government has positioned the project as a means to prepare Kuwait for an era of declining oil revenues. The project would fuse Kuwait into China’s Belt and Road Initiative, a 21st Century take on the Silk Road made up of a ‘belt’ of overland corridors and a maritime ‘road’ of shipping lanes.
Kuwait is the first GCC country to sign up to China’s efforts to tie Southeast Asia to Eastern Europe and Africa, a swath of the globe that accounts for 71 countries, half the world’s population and a quarter of global GDP.
In December 2019, the Capital Market Authority said that the sale of its stake in Boursa Kuwait to Kuwaiti citizens was more than 8.5 times oversubscribed, in the last stage of the company’s privatisation process.
The first phase of Kuwait Stock Exchange's initial public offering took place in February 2019 through an open bidding process in which a consortium of domestic and international investors, including Hellenic Exchanges-Athens Stock Exchange Holding acquiring a 44 per cent stake in the company.
— Fitch Ratings
28 FINANCIAL CUSHION Although Kuwait is being confronted by a KWD 9.2 billion deficit as projected in the 2020/21 budget, the government will likely draw from the state reserve fund to finance the deficit.
The country has long enjoyed the trappings of the world’s first sovereign wealth fund, which Sheikh Abdullah Al-Salem set up in 1953. The exact sum of the sovereign wealth fund remains a secret, as its assets are not disclosed. Kuwait has a law that prohibits the Kuwaiti Investment Authority (KIA) from revealing the size of its holdings.
According to IMF estimates, KIA’s assets surpassed 420 per cent of GDP by end-2019, as the Future Generations Fund continues to receive mandatory transfers from the government and generated strong returns on its assets. This affords Kuwait significant buffers to respond to any potential future shocks.
S&P stated that at 420 per cent of GDP, Kuwait’s net general asset position was the highest of all rated sovereigns at the end of 2019. Kuwait is also ranked at the third-highest investment grade level by Moody’s, S&P Global and Fitch Ratings, the three major credit assessors.
Kuwait’s other financial cushion is the FGF created in 1976 to provide financial security for when Kuwait’s oil reserves finally dry up. The government has never wavered on its promise to deposit 10 per cent of all oil revenues into the fund, which is now believed to be worth $420 billion, according to Fitch Ratings.
Kuwait’s General Reserve Fund (GRF) holds the accumulated government surpluses after transfers to the FGF, and the government draws on its assets for financing, including to pay for maturing debt. Fitch said that the GRF could sustain the country for five years before it runs out, however, the investment vehicle’s value is thought to have fallen for the fourth year in a row in 2019.
BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228 according to the National Bank of Kuwait (NBK). CBK reported that banks dominate the domestic financial sector, with $221 billion of assets in 2018 or 89 per cent total disclosed financial assets.
Furthermore, the banking sector has also shown resilience in the face of the oil price decline, notching compound annual growth in assets of 4.7 per cent from 2014 through 2018.
According to PwC, the Kuwait banking sector’s profile is expected to continue growing, with lenders positioning themselves as key partners for infrastructure projects and public-private partnerships. Vision 2035 also offers opportunities for banks to develop new corporate offers and credit facilities.
Last year, credit growth in Kuwait accelerated, spurred by the central bank’s decision in 2018 to increase ceilings on personal loans and supported by favourable monetary conditions. The Central Bank of Kuwait (CBK) deployed various monetary policy instruments to support lending to the economy while maintaining the attractiveness of the dinar, said Moody’s.
The World Bank lauded CBK’s plans to conduct a comprehensive inventory of macroprudential tools to ensure that they continue to promote financial sector resilience, prevent a build-up of systemic risks, and balance financial stability and growth objectives.
Despite the challenging operating environment, S&P Global said that the Kuwait banking sector remains resilient with stable profitability and improved asset quality.
BOOSTING FDI To facilitate foreign direct investment (FDI), the government launched the Kuwait Direct Investment Promotion Authority (KDIPA) in 2013. Kuwait has also passed laws allowing 100 per cent foreign ownership of companies approved by the KDIPA and instituting tax holidays and customs exemptions.
The merits of these policies are $3.2 billion in foreign investments between January 2015 and March 2019. According to KDIPA’s latest annual report, the investments were concentrated in the services sector such as information technology, oil and gas, construction, training, health, energy, consultancy, market research and entertainment services. KDIPA also said that the investment came from 37 global companies representing 16 foreign and Arab countries from developed and emerging economies.
Kuwait is also opening up its bond market to foreign investors. Despite KIA being among the world’s largest sovereign wealth fund—with almost $548 billion (420 per cent of GDP) held in assets abroad—the state-issued $8 billion in five- and 10-year bonds in 2017.
The debt issuance authorisation expired in October 2017. However, Kuwait is in the process of drafting a new law to allow issuance of 30-year bond. The new legislation would also let the country raise its debt ceiling from KWD 10 billion to KWD 25 billion and allow the issuance of sovereign Sukuk.
HYDROCARBON INCOME Data from Kuwait’s statistics bureau shows that hydrocarbons remain the backbone of Kuwait’s economy, although their share of GDP has dropped to 55 per cent from 61 per cent in 2014.
As of 2018, Kuwait was estimated to be the world’s eighthlargest crude oil producer, with the ninth-largest oil reserves, said S&P. Assuming current production levels, the total proven oil reserves are equivalent to around 100 years while the cost of production is among the lowest globally.
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The physical nature of Kuwait’s oil and gas reserves means that the country enjoys some of the lowest costs of production of any oil province in the world. As such, it is hardly surprising that the country’s economic performance will remain largely determined by oil industry trends.
Oil dependence worked in Kuwait’s favour in 2017/18 when oil prices were higher, lifting growth and bettering fiscal and external balances. However, 2020 might be a different story. S&P expects Kuwait’s oil production to average about 2.65 million bpd in 2020 compared to the 2.8 million bpd originally planned and included in the 2019/20 budget. Due to production curbs in compliance with OPEC+, Kuwait’s overall economy is projected to expand by a modest 0.5 per cent this year, similar to that of 2019 where the country’s real GDP was held back by OPEC+ decision to cut oil production.
— ProTenders
UNRESOLVED ISSUES Kuwait has an unpredictable monetary policy unique for an Arabian Gulf state and recently appointed the first female finance minister in the region. The country has an elected legislature but the acrimonious relationship between lawmakers and the government has resulted in eight administrations. Bloomberg reported that the fallout on fiscal policy is also becoming harder to contain because of the disputes between the legislators and appointed government. In her 2019/20 budget presentation, Mariam Al-Aqeel, the Kuwait Finance Minister, said that the debt law which was previously blocked by the lawmakers is now in parliament. The finance minister is expecting the government to fight for the law to be approved since the cost of borrowing is less than the cost of withdrawing from the reserves.
The lack of a new public-debt law has made it impossible for the government to finance its deficit by borrowing, forcing it to rely on the GRF’s assets instead. Kuwait plans to plug its 2020/21 deficit through withdrawals from the GRF. According to Moody’s estimates, GRF assets has declined by KWD 14.7 billion from 2015-2016 to 2018-2019 fiscal years.
Fitch Ratings expected parliamentary authorisation to issue or refinance debt to be approved in the fiscal year to end-March 2020 but given continued political acrimony, the rating agency said that it will be delayed until 2020/21. The pace of the decline in GRF assets slowed in 2016/17 on the back of heavy international and domestic bond issuance, but this largely changed in 2017/18 after the expiration of the public debt law.
The parliament also blocked some crucial reforms, such as the introduction of value-added tax (VAT) and excise taxes in Kuwait. The prospect of new levies such as VAT might be even more remote this year as lawmakers gear up for parliamentary elections, with popular issues at the forefront.
Nevertheless, in spite the various challenges the government is grappling with, Kuwait remains in a strong financial position independent of external help and is on the right course in developing it’s economy.
Kuwait projected KWD 9.2 billion budget deficit in 2020/21
Despite the tumultuous relationship between the government and politicians, Kuwait introduced financial and structural reforms to boost private sector growth and employment.
KUWAIT in numbers
POPULATION
4.2 million (2020)
1m
Source: Worldometers
5m
GDP NOMINAL GDP
$109 billion (2016) $120 billion (2017) $141 billion (2018) $137 billion (projected 2019) $143 billion (projected 2020)
Source: IMF
REAL GDP GROWTH
Source: IMF
GDP PER CAPITA
Source: IMF
REAL OIL GDP (annual percentage change)
MEDIAN AGE
36.8 years
Source: Worldometers
REAL NON-OIL GDP (annual percentage change)
Source: IMF
GROSS DEBT (per cent of GDP)
Source: The World Bank
OIL AND GAS SECTOR
CRUDE OIL AND GAS EXPORTS (millions of bpd)
Source: IMF
BREAKEVEN OIL PRICES (US$/barrel)
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