x Abu Dhabi, UAEMonday 22 January 2018

Kuwaiti protests highlight financial fears

Kuwaitis are feeling the pinch and demanding the government do more to protect their finances.

Kuwaitis are having to tighten their belts as the global fiscal crisis is felt in the kingdom.
Kuwaitis are having to tighten their belts as the global fiscal crisis is felt in the kingdom.

Faisal al Bader stood on the floor of the Kuwait Stock Exchange last week, observing a fourth day of protests for a suspension of trading until a plan could be put in place to save the declining market. Kuwaiti stocks had dropped 38 per cent in just four months, erasing about 25 billion Kuwaiti dinars (Dh340bn) from investors' portfolios as the spreading global financial crisis wreaked its havoc. "They must put 5bn dinars in," said Mr Bader, one of the protesting traders. "The government must do something. The oil price keeps going down, and stocks keep going down. It's not good."

In Kuwait, where the parliament is elected, people tend to speak their mind in public and political activism is thriving, hardly any subject could be more charged these days than the turmoil in the market and the government's obligations towards it. Traders protested throughout last week at the stock exchange first, and eventually at parliament and even the Emir's palace, demanding government intervention. There have even been calls to reshuffle the government and dissolve the cabinet, a seemingly high political price to pay for the vicissitudes of a free market.

But then, tensions are running high. As crude oil prices sag to less than half their mid-summer highs, settling yesterday at around $68 per barrel from record-breaking prices of $147 back in July, oil-rich governments across the Gulf find themselves with less money to spend. At the same time, inflation remains in the double digits; in Kuwait the most recent measures pegged it at 11.1 per cent, matching the official inflation figure for the UAE last year.

Meanwhile, the banking systems that have helped finance the region's growth have come under stress in recent months. Banks are finding it harder to borrow money, and credit conditions have not improved significantly despite cash injections from governments. Interbank lending rates across the region remain well above where they were a few months ago. The three-month Emirates Interbank Offered Rate, for example, was below two per cent in May, while it now sits at nearly five per cent.

Looming downgrades of banks in the UAE and Kuwait, where one lender last week revealed it had lost about 200 million dinars when clients took bad bets on currency derivatives, also do not bode well for the sector. And adding to the precarious position that Gulf countries now find themselves, some are deeply in debt. According to Fitch Ratings, the UAE owes US$170bn (Dh624.44bn) in external loans, up from $145bn at the end of last year.

Then, of course, there's the issue of stock markets. "The newspaper is always scaring us," says Ahmad Qasem, a young stockbroker in Kuwait. "Is this the end of the GCC? It's seriously scary stuff, especially for young people. We don't have much time to make any money or establish ourselves. If we're going into a recession and we're thinking about getting married, it's very scary." In Kuwait and across the Gulf, the new realities of the global crisis are pulling at the fabric of societies accustomed to booming oil prices and rising stock markets. And while its relative freedom separates it from GCC neighbours, what is happening in Kuwait could illustrate the shape of things to come across the region.

Gulf countries have to a large degree been nanny states during the oil boom, stepping in with an open wallet to help citizens in good times and bad. Now, however, the simple economic reality is beginning to set in that removing some of the safety nets that have been in place for generations is a possibility if markets and oil prices continue to tumble. As the financial crisis reaches deeper into the Gulf, development and economic diversification plans built on the assumption of expensive oil are growing ever harder for governments to honour.

"It's like somebody who makes $50,000 and is doing fine who gets another job and starts making $250,000," says Shahid Hameed, the head of asset management for the GCC at Global Investment House, the largest institutional asset manager in Kuwait. "You get used to a different level of income. If you go back to $100,000, you feel you're worse-off." That worse-off feeling is partly what has angered traders in Kuwait in the past couple of weeks and led them to demand a government bailout. The Kuwait Investment Authority, the country's sovereign wealth fund, is already rumoured to have injected between $200m and $1bn into the country's stock exchange, both by buying mutual fund shares and investing in the market directly. But the traders have also been emboldened by precedent.

As recently as 2006, when Gulf markets took a summer-long nosedive, a fund was set up in Saudi Arabia to buy shares to prop up the market. It failed to work. A similar fund was set up in the US after the Great Depression, and that also proved unsuccessful. Yet the demand for action in the cash-rich Gulf remains strong. "That's the legacy, and it needs to change," one investment professional said. "The government cannot go back to everybody and make their losses good. I bought Kuwait Finance House shares personally, for example, and I lost money. Do I go to the government and ask for my money?"

Many traders in Kuwait refer to the "Manakh crisis" as an almost-sure sign that the government will come to the rescue. "A few years ago we had the Manakh problem, when the government compensated all the investors who lost money," Abdullah al Eissa, a retired businessman, says. "Now they are expecting the same." During the Souk al Manakh crisis, Kuwaiti investors, fired by the sharp spike in oil prices in the late 1970s, started piling their newfound wealth into local companies. A market called the Souk al Manakh, an over-the-counter bourse that ran parallel to the official market, was created to satisfy the demand.

But the Souk al Manakh quickly grew into a speculative bubble, pushing valuations so high that at one point Kuwait's market was the third largest in the world by capitalisation, behind New York and Tokyo. Predictably, the bubble burst in spectacular fashion in the early 1980s. The government had to step in and started buying stocks to put a floor under prices, but its obligations soon became too large to meet. The bottom finally fell out. When it was all over, individual investors who had put too much of their fortunes into this poorly regulated market were compensated for their losses by the government.

Some of the attitudes born of the Manakh crisis remain today. Many investors in Kuwait see the market not as a way to invest in companies, but as a means of making money, quickly. As in other Gulf countries, there is a strong equity culture, even among average citizens. As a result, the Kuwait market is less a reflection of the staid opinions of long-term institutional money managers than a gauge of the fickle attitudes of the man on the street.

In spite of this history of speculation and government intervention, little has been done in Kuwait by way of market regulation. The stock market lacks a regulator, such as the equivalent of the Fincncial Services Authority in the UK or the Securities and Exchange Commission in the US. Some observers say this makes Kuwait's bourse an unfair playing field that has benefited influential people with high political connections and a penchant for playing the market.

Amani Bouresli, a professor of finance at Kuwait University, has since 2006 been pushing a bill at the behest of the government to create a regulator called the Capital Markets Authority. She consulted with authorities in the US and elsewhere, came up with a set of modern market regulations and presented it to the legislature. It stalled, she says, because it ran against the interests of certain powerful figures in the government.

"With good regulations, things will improve," she says. "When you have recessions, when you have a bad economy, the effect will be less severe on more regulated countries and more regulated economies. Maybe that's why we have seen a more severe effect in Kuwait, because the legal structure is not correct. There is no entity that monitors the stock exchange. There is a huge conflict of interest, and the public interest is not served because certain individuals are controlling the market."

The global crisis may force Kuwait to adopt more regulation and transparency. The revelation, for example, that Gulf Bank, the country's fourth-largest by market value, had lost an estimated 200m dinars on soured currency-derivative contracts, increased the urgency of appeals to require listed companies to disclose more about their holdings to investors. The bank's troubles also prompted the resignation of the company's chairman following a run on the bank as worried depositors tried to withdraw their money.

But the bigger issue is that just as pleas for reform grow louder and oil prices drop, demands are pouring in for governments to write big cheques to save investors, markets and economies. That could end up raising uncomfortable questions about the future that were easier to ignore when oil prices were high and the economic picture looked sunny. Indeed, the grand goals of Gulf governments to develop infrastructure, move away from oil dependency and bring more of the population under private employment - in Kuwait, over 80 per cent of citizens are employed directly or indirectly by the government - are coming under renewed strain.

Shamael al Sharikh, a columnist at the Kuwait Times, puts the new economic reality in stark terms. "The country is in the midst of the financial crisis, there's a credit crunch, inflation is high in Kuwait, and people are really feeling economic difficulties for the first time," she says. "OK, there is no homelessness, no unemployment and we don't have many problems that are faced by even industrialised countries. But at the same time, this is not the Kuwait of the 1970s, and people are in shock. The times they are a-changing."