Monetary Developments - July 2008

Monetary Developments - July 2008
Slowdown in credit growth continues.  Speculative and seasonal summer outflows offset expansionary impact of higher government spending on liquidity
In its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that broad money supply measure (M2) expanded at a modest 0.2% (+KD 43 million) in July following a large contraction in the past month. Money developments in the past two months departed significantly from the expansionary path followed over the past two years, sending year-on-year growth to its lowest point since November of 2006. The main culprit behind this slowdown remains sluggish credit growth. Moreover, persistent outflows from the system have also contributed to the deceleration, with speculators unwinding long dinar positions.  These outflows came atop seasonal transfers of funds (out) by residents traveling abroad, and seem to more than offset expected liquidity infusions from higher government spending and transfers. For the fiscal year to date, which started last April, government expenditures more than doubled mostly from the extraordinary transfers to the Public Institute for Social Security (PIFSS) and on capital projects. Transfers to PIFSS alone rose by more than KD 1.5 billion, with the extraordinary payments basically made in June and July, while other demand-impacting expenditures rose 19%. However, there was no comparable increase in bank deposits, which suggests that the transfers to PIFSS were mostly placed outside the local banking system. No doubt, this made it easier for the Central Bank of Kuwait (CBK) to squeeze out excess liquidity in its fight against inflation. Eventually, the success of tighter monetary policy in bringing down inflation will depend on future fiscal policy.
NBK notes that the slowdown in credit growth has been noticeable. From a year-on-year high of 37% registered in January of this year, domestic facilities to resident were up 23% in July from a year ago. The latest monthly increase was a mere 0.5%, with much of the recent slowdown attributable to supply side forces.  Banks remain restricted by slow deposit growth and by CBK limits.
Personal facilities, mainly for the purchase of securities rose 1.2% (+KD 84 million), leading the expansion in credit in July. Meanwhile, the trading sector was the only other area to see notable growth, with loans rising 2.1% (+KD 42 million). All remaining sectors registered negligible change including real estate, owing to a recently passed law.  That law prohibits companies from trading or investing in residential property other than apartment buildings.
Private resident deposits rose KD 56 million in July, but there was a notable shift in deposits from sight to time. Meanwhile, local banks continued to support their liquidity and lending activity by attracting deposits from non-residents to the tune of KD 110 million in July. Currently at KD 4.2 billion, non-resident deposits make up 17.2% of total private deposits, up from 14.9% a year earlier and 5.1% from two years back.
CBK’s foreign assets dropped KD 123 million in July, following a KD 527 million drop in the previous month. The drop reflects seasonal transfers by residents and possible continued unwinding of speculative long KD positions.
Meanwhile, total liquid assets of local banks (net of interbank deposits) fell KD 57 million in July. But this drop was accompanied by a major shift from cash and idle CBK balances (-KD 304 million) into CBK bonds (+KD 230 million) as CBK resumed absorbing liquidity. As a result, the domestic liquid assets to total assets ratio (using net inter-local bank deposits) fell to 8.8% from 9.1% the previous month.
NBK also notes that Kuwait’s interbank rates (KIBOR) for all maturities rose as domestic interbank liquidity dried up in July. Average rates for the 1 and 3-months placements jumped over 40 bps to 1.91%, 2.21%, respectively. This has reversed a trend observed since September of last year that has sent KIBOR down to record lows in June of this year. Meanwhile, LIBOR rates were almost unchanged for different maturities during the month. Accordingly, USD interbank rates remained higher than KD rates but the spread narrowed to 51 bps for 1-month placements.