Monetary Developments June 2008
Large deposit withdrawals restrict banks’ ability to add new loans in the near term, and places upward pressure on deposit rates
In its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that broad money supply measure (M2) contracted by 3.2% in June, reversing last month’s expansion. The contraction was driven by a large drop in private deposits and a concurrent drop in Central Bank of Kuwait’s (CBK) foreign assets. While a seasonal pattern may account for part of the outflow, we suspect it was amplified by a massive unwinding of swap positions set up last year around the time the CBK moved away from the dollar peg. Meanwhile, keeping with CBK’s mandatory 80% ceiling on the loan-to-deposit ratio (LDR), the drop in deposits has significantly affected banks’ ability to offer new loans to their customers. Consequently, credit growth has slowed considerably from its recent monthly averages, and is expected to remain subdued barring new infusions in the near term.
Growth in credit to residents decelerated in June to KD 83 million, compared to a monthly average of KD 386 million in the first five months of the year. The construction sector and other unspecified sectors captured most of the increase in lending, rising 6.5% (+KD 100 million) and 4.4% (+KD 65 million), respectively. Surprisingly, personal facilities grew KD 67 million, despite CBK measures taken to limit consumer lending. Meanwhile, real estate loans declined 1.4% (-KD 80 million) on the back of a similar drop in May, undoubtedly affected by the slowdown in sales activity depressed by a recently passed law restricting investment activity in residential property by companies..
NBK notes that private resident deposits in local currency dropped KD 616 million in June, of which KD 342 million was in time accounts while the remaining was in sight. Meanwhile, deposits in foreign currency fell KD 46 million. Banks also witnessed a decline in private non-resident deposits amounting to KD 130 million. Consequently, our indicative measure of the LDR shows significant deterioration in June rising back to its March levels and reversing the improvements witnessed in the previous two months. NBK's indicative measure is based on CBK's monthly statistics that cover only domestic banking activities, whereas the LDR requirement is applied on a bank-wide basis and thus takes into account domestic as well as offshore loans and deposits.
Monetary Indicators, June 2008
Year-on-year percent growth
Foreign assets of the CBK dropped KD 527 million in June, pushing year-on-year decline to KD 2 billion (-36%). Meanwhile, net foreign assets (NFAs) at local banks fell KD 203 million.
NBK also notes that local banks’ idle funds namely cash and cash balances of banks fell KD 119 million to reach KD 581 million. Other placements with CBK and holdings of T-Bills fell KD 115 million, reflecting reduced absorption of excess liquidity by the CBK. In total, liquid assets (excl. interbank deposits) fell KD 240 million in June pushing the domestic liquid assets to total assets ratio (using net inter-local bank deposits) down to 9.1% from 9.7% the previous month. Even while including net foreign interbank deposits, the ratio shows a 1.5 percentage points drop, the result of the large decline in net deposits with non-resident banks.
Kuwait interbank rates (KIBOR) for all maturities rose as outflows from the system constrained liquidity. Average rates for the 1, 3, 6, and 12-months placements rose 2-6 bps to 1.48%, 1.76%, 1.99%, and 2.22%, respectively. LIBOR rates also rose 1-19 bps for different maturities, remaining well above KIBOR rates. The spread between KD and USD interbank rates widened to 100 and 112 bps below zero for the 3-month and 6-month placements, respectively.
Interest Rates, June 2008
Percent per annum
Meanwhile, the drainage from the local market is forcing banks to bid up deposits once again. Average customer deposit rates for placements with maturities of 3-month and above have picked up between 1 and 7 bps in June following a large string of declines in the previous months. Rates offered on 1, 3, 6, and 12-month placements averaged 3.39%, 3.52%, 3.76% and 3.87%, respectively.
