In its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that money supply (M2) declined by 2% in October, the largest one-month drop on record. As a result, the year-on-year growth in money supply continued its slowdown to 13.6% after having accelerated earlier this year to reach a high of 17.9% in July. The October drop came despite continued growth in credit, albeit at a much more moderate pace than in previous months. While both local and foreign currency deposits at local banks shrank – the latter being of much greater magnitude – banks saw other liabilities rise including government deposits and deposits from foreign banks.
Private sector deposits declined by KD 304 million, the largest drop in over a decade, notes the NBK report. A KD 207 million drop in KD time deposits and a KD 211 million fall in foreign currency (FC) deposits were behind this. Higher KD sight and savings deposits helped offset some of the declines, reducing the total drop in KD deposits to KD 94 million.
The decline in KD time deposits amounted to 3.5% and followed a smaller decline the previous month. Time deposits were the largest source of deposit growth in 3Q05 having risen by 4.5% and contributed nearly 80% of the net increase in private deposits during the period. The decline in October erased most of these gains. Meanwhile, sight deposits, which remained by far the most important source of deposit growth thus far in 2005, rose by KD 71 million during the month, while savings deposits rose by KD 43 million.
Domestic credit rose by KD 57 million, its smallest increase in eight months, to reach KD 11.2 billion, according to the NBK report. Though the year-on-year growth in credit declined slightly to 13.8%, it remained very much within this year’s trend, having come down from a high of 23% in June 2004 after the Central Bank of Kuwait (CBK) instituted breaks on credit growth with the introduction of an 80% ceiling on the loan to deposits ratio of local banks.
Personal facilities was the largest contributor to credit growth in October, following by lending to the trade and construction sectors. Personal facilities (excluding lending for the purchase of securities) rose by KD 49 million, while lending for the purchase of securities increased by KD 16 million. Both of these increases were notably smaller than increases in September. Credit to the trade sector rose by KD 20 million, while the construction sector saw credit increase by KD 16 million. Meanwhile, lending to the real estate sector dropped by KD 24 million, though it remained the second largest contributor to credit growth this year after personal facilities. Credit to industry and to non-bank financial institutions was also lower.
Consolidated bank assets rose by KD 60 million to KD 20.56 billion following a month which saw the largest recorded increase ever. Most of the rise was in liquid assets, primarily in cash and current balances with the Central Bank of Kuwait (CBK) which rose by KD 141 million. Meanwhile, one-month time deposits placed with the CBK decreased by KD 28 million, following two months in which such deposits rose for the first time in months. The ratio of liquid assets (cash, balances with CBK and holdings of public debt instruments) to total assets rose to 14.9% from 14.4%. Though the ratio was slightly below its peak level at the end of August, it was well above the 13.4% recorded at the end of 2004. Meanwhile, foreign assets declined as deposits with non-resident banks dropped by KD 134 million and credit to non-residents was KD 41 million lower.
NBK reports that interest rates continued to move higher prompted by the 25 basis point (bp) hike in the CBK’s benchmark discount rate on October 2. This move, a delayed response to a similar hike by the US Federal Reserve during September, was followed by another 25 bps increase on November 2 which lifted the rate to 6.0%.
Local interbank rates maintained an upward trend in October in response to the discount rate hike early in the month and CBK efforts to mop up excess liquidity. Kuwait interbank offer rates (KIBOR) rose for all maturities, but was led particularly by longer maturities. The 1-month rate rose by 32 basis points (bps) to 4.22%, while the 3-month KIBOR gained 38 bps to 4.45%. A 24 bps rise in the 12-month KIBOR followed a far more modest gain the previous month, and pushed the rate to 4.70%. The gap between the 1-month KIBOR and the discount rate continued to shrink falling to 153 bps.
Private KD deposit rates gained momentum in October. The average rate paid on all KD deposits rose by 14 bps, the largest increase seen since October 2004. Rates on KD time deposits rose by 23–29 bps for maturities of 1 to 12 months following increases of 20–21 bps in September. The increase in KD deposit rates exceeded that seen in rates of US dollar time deposits for short maturities. As a result, the gap between the KD and US dollar rates on 1-month deposits rose to its highest level in nearly a year rising to 19 bps. The gap for 12-month deposit rates averaged 14 bps.