In its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that money supply (M2) grew at its fastest rate in three years during 2004 rising by 11%.
This growth was driven by continued strength in bank lending, though it was slower than the previous year, and a rise in net foreign assets. The latter followed two years of net outflows and took place mainly during the fourth quarter of 2004. Money growth in December was more rapid still, jumping by nearly KD 200 million boosted by a notable rise in net foreign assets during the month. Credit growth slowed further during the month as a result of new limits on bank loans.
Growth in credit facilities to residents topped 16.5% during 2004 as bank lending reached KD 9.8 billion. This growth, which followed a rise of 21% in 2003, occurred largely in the first three quarters. Indeed, 4Q04 saw growth slow down substantially to an annualised 1.6% with December actually seeing a decline in total outstanding credit facilities, the largest shrinkage in four years.
NBK’s economic brief mentions that the decline in credit growth near the end of the year was the result of a Central Bank of Kuwait (CBK) directive in 2Q04 requiring banks to meet an 80% loan-to-deposit ratio by the spring of 2005. Since most banks are in breech of this new regulatory ceiling, they have sought to reduce their loan portfolios and limit lending growth. The new directive has also introduced increased competition for bank deposits.
Despite the squeeze on credit, money supply was boosted instead by a substantial increase in net foreign assets held by the CBK as well as local banks. CBK’s foreign assets jumped by 27% during 4Q04 to reach KD 2.2 billion at the end of the year. This increase was the largest quarterly rise in recent years and came on the heels of a nearly steady decline since mid-2002.December also saw net foreign assets of local banks double on the back of a large increase in local bank deposits with non-resident banks to a record KD 2.1 billion or nearly 11% of total bank assets. According to NBK, there is no obvious explanation for the increase in these deposits, though some may be related to the forced downsizing of credit portfolios at many local banks. This resulted in a substantial jump in total net foreign assets in the system of 46%, the largest increase by far since liberation. It also helped reverse a trend of shrinking bank assets seen during the previous six months. In December, bank assets rose by 2.6% to KD 19.1 billion, resulting in a slow but positive growth of 1.5% for the full year, the slowest since 1999.