Analysis: The dismissal of the democratically elected parliament is a cause for disquiet, but also hope.
Kuwait awaits fiscal promise
When Kuwait's emir, Sheikh Sabah Al Sabah, dissolved the country's democratically elected parliament last month, analysts and international lenders looked on with a mixture of disquiet and hope. On the one hand, the quarrelling between the country's parliament and its cabinet, which is led by the ruling Al Sabah family, raised some concerns about Kuwait's stability. After the dissolution of parliament, Moody's Investors Service placed the country's sovereign credit rating on review for a possible downgrade over fears of deeper political strife in the future. "We discern a deteriorating trend in government effectiveness exemplified by the repeated changes of government and parliament," said Tristan Cooper, an analyst at Moody's. On the other hand, some welcomed the move. Over the past few months, Kuwait's parliament had blocked efforts to protect the country's financial sector from the effects of the financial crisis and tarnished the country's business reputation by unexpectedly pulling out of two multibillion- dollar partnerships with international investors. As Kuwait's financial system hung in the balance, economic rescue efforts elsewhere in the GCC were being enacted quickly and decisively. The clock was ticking, analysts said, and the time for parliamentary bickering over exactly how to address the crisis had long passed. And so, it came as a relief to many on March 26 when Kuwait's cabinet passed the comprehensive economic rescue bill which the parliament had so vehemently opposed. "When the parliament was dissolved, the market cheered," said M R Raghu, the head of research at the Kuwaiti investment firm Markaz. Although the parliament will still have to endorse the Bill when it is reconvened in May after new elections, by then the government will have already introduced large portions of the rescue effort, making it difficult to roll back the measures. The plan is by far the most comprehensive in the region so far, although elements of it have been tried elsewhere. In Qatar, the government bought local banks' investment portfolios, while in the UAE, the Government has offered up to Dh120 billion (US$32.67bn) for local banks, Dh50bn of which has already been handed out. The Kuwaiti plan, by contrast, addresses the effects of the crisis from many angles. The plan is designed to get banks lending again, by effectively guaranteeing half of every new loan the banks extend to sectors that the government deems to be productive, rather than speculative. The aid must not be used to repay large debts to international creditors. The country will also use its sovereign wealth fund, the Kuwait Investment Authority, to bolster local financial institutions' balance sheets through capital injections, although such aid will be extended only to those banks deemed responsible enough to merit help. And if local banks' investment portfolios continue to decline, the government will guarantee their losses for the next 15 years. The total size of the bill is not to exceed 1.5bn Kuwaiti dinars (Dh18.67bn), although it is expected to enable banks to lend about 4bn dinars within the next two years. Such efforts will augment smaller measures taken by the central bank late last year, including a move to guarantee all local bank deposits and cuts in the central bank's key policy rate. Yesterday, the bank again cut its benchmark lending rate, from 3.75 per cent to 3.50 per cent. The plan has often been called a "stimulus Bill" but it differs in important ways from stimulus packages that have recently been passed in the West. The Kuwaiti measure does not seek to revive the local economy by injecting government funds directly into citizens' wallets, or by increasing infrastructure spending. Over the past decade, Kuwait did not sign up to the same scale of debt that has lately punished other Gulf economies. But the country's financial and property sectors have been among the hardest hit by the crisis in the region. The single biggest threat to Kuwait's financial system remains a group of large non-bank investment firms that took risky bets on financial instruments that came under particular pressure late last year. In January, one Kuwaiti investment firm, Global Investment House, became the first major financial institution in the Gulf to default on its debts as a result of the crisis. The firms lost 9.2bn dinars on their investments in the second half of last year, according to the state news agency. If the government does not step in soon, more defaults could be on the way, analysts say. And if more investment firms, which make up more than half of all listed firms on the Kuwaiti bourse, begin to default, the country's banks could become seriously threatened. Many of the banks have direct links to such firms and are also dangerously dependent on fluctuations in local stock and property markets. When Global Investment House announced it had defaulted on most of its debts, analysts began calling for more comprehensive, decisive action. All hopes eventually came to rest on the economic rescue Bill, which was drafted late last year by an emergency task force led by the governor of the central bank. "Government intervention should definitely be questioned under normal circumstances," Mr Raghu said. "But circumstances are hardly normal and therefore, instead of wasting time debating, the best course of action would be to follow the global model." Parliament, however, objected that the plan benefited the banks while ignoring the rest of the population. As in the US, policy makers aimed their rescue package at the core of the problem, the financial sector, but in doing so risked appearing to have yielded to the pleas of those well-connected bankers whom the populace blames for creating the crisis. Some members of Kuwait's parliament have even called for alternatives to the Bill aimed almost exclusively at the common man, such as calling for all consumer debts to be excused. The Kuwait Stock Exchange, which has fallen by 38 per cent in the past six months, has risen by 8.3 per cent since the Bill was finally passed. There is a caveat, however: 36 locally listed companies had trading on their shares suspended last week for failing to submit their 2008 financial results. As a result, only those companies with nothing to hide have continued trading, giving the Kuwaiti market a temporary veneer of extra solidity which happened to arrive during a global stock market rally. The next worry is that when parliament reconvenes, it could decide to shrink the government's budget for this year to avoid a fiscal deficit in a time of low oil prices. Such a decision would effectively be the opposite of a conventional "stimulus package", and would keep the government from using one of its most effective weapons to battle economic slowdown, especially given its vast savings. The central bank governor has cautioned against such a move. "We believe in the current circumstances, it is much better to record a budget deficit while increasing capital expenditure," Global Investment House said in a recent note. "Economically speaking, a reserve fund should be accumulating surpluses through the good times so that such surplus could be invested and used in bad times to capitalise on it. "Currently, Kuwait is in a dire need of an economic stimulus to support economic activity." Although bankers have breathed a collective sigh of relief since the economic rescue Bill passed, political battles over budgetary spending are looming. "There is absolutely no good reason why Kuwait couldn't run a small deficit this year. It would help a lot," one Kuwaiti banker said.