Kuwait: Funds outflow slows money growth despite strong credit growth
In its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that money supply (M2) rose by only 0.1% in April, the smallest increase in four months. This followed a strong increase in March and rapid growth in 1Q06 which topped an annualized 52%. The small increase in M2 in April helped ease year-on-year growth in money supply to 15.5%. A large drop in the deposits of local banks with foreign banks was a main drag on money supply growth having offset a continued strong rise in domestic credit.
According to the NBK report, private sector deposits were almost unchanged, rising by a mere KD 7 million during April on the heels of a large increase the previous month. A healthy rise in KD deposits of KD 115 million was offset by a KD 108 million decline in foreign currency deposits. Higher KD deposits reflected a KD 149 million rise in sight deposits and a KD 85 million increase in savings deposits. Time deposits, meanwhile, declined by KD 119 million, the first monthly decrease following six months of strong growth. Coming after the large increase in time deposits during March, the April decline may simply reflect the movement of short-term funds.
April saw continued resilience in credit growth, as outstanding credit facilities rose by KD 273 million to reach KD 12.9 billion. Year-on-year growth rose to 25.4%, while growth in credit thus far in 2006 hit an annualized 28.5%. Growth was most rapid in lending to non-bank financial institutions, followed by lending to the real estate sector, which rose by KD 71 million and KD 62 million, respectively. Personal facilities excluding lending for the purchase of securities rose by KD 43 million boosted by strong growth in installment loans. Lending for the purchase of securities also saw relatively strong growth rising by KD 26 million following a significant decline in March.
The NBK report states that the month saw a net outflow of funds from banks which countered other sources of liquidity growth. Net foreign assets (NFAs) declined by KD 110 million reflecting a KD 440 drop in the deposits of local banks with foreign banks. Though this amount was offset by a decrease in the foreign liabilities of local banks, NFAs of local banks were still down by KD 239 million. An increase in the foreign assets of the Central Bank of Kuwait (CBK) by KD 116 million helped temper the decline.
Consolidated bank assets dropped by KD 256 million in April, as banks’ liquid assets and foreign assets declined during the month. The decrease, the first since December 2005, reduced total bank assets to KD 23.1 billion, following substantial growth during the first quarter which reached an annualized 37%, the highest rate in years. The declines in foreign assets and liquid assets were partially offset by growth in credit facilities.
Bank’s liquid assets (cash, balances with CBK, and holdings of public debt instruments and CBK bonds) declined by KD 49 million with interbank placements declining by a further KD 101 million. Most of the decline in liquid assets was in time deposits with the CBK, which decreased by KD 47 million in April following substantial gains in 1Q06. As assets saw a larger decline, the ratio of liquid assets to total bank assets rose slightly to 14.7% at the end of April.
NBK reports that KD interbank rates moved lower for the second consecutive month during April as the CBK kept its key policy rates unchanged. The discount rate, at 6%, was last lifted in early November, while the CBK’s repo rate was unchanged at 5.375% since an early February hike. This, combined with the high level of liquidity in the system, helped ease short-term KD interbank rates. The 1-month Kuwait interbank offer rate (KIBOR) fell by 9 basis points (bps) to 5.18%, while the 6-month KIBOR lost 16 bps to 5.83%. Meanwhile, the 12-month KIBOR gained 8 bps to 6.18%.
Easing rates also characterized customer deposits in April following the strong growth seen in deposits last month. Average rates on 1-month and 3-month time deposits moved lower by 8 bps and 3 bps, respectively. The exception was the average rate on 6-month deposits which rose by 4 bps. As maturing deposits continued to move into higher rate tiers, the weighted average rate paid on all KD deposits rose by 9 bps in April.
According to NBK, on May 11 the CBK proceeded to lift its repo rate by 25 bps to 5.625%, the first increase since early February. This move, which reduced the gap between the repo rate and the discount rate to 3.75 percentage points, is expected to help move interbank bank and deposit rates higher during May.
© 2006 Al Bawaba (www.albawaba.com)