credit growth reaches unprecedented levels in 2q07, though deposits do not follow suit… central bank foreign assets retreat as dinar speculation winds down
In its latest economic brief on monetary developments, National Bank of Kuwait (NBK) reports that growth in the money supply (M2) remained relatively modest during 2Q07 following rapid growth the prior quarter. M2 rose by 2.5% during 2Q07 to KD 17.7 billion, while year-on-year money supply growth remained at a high 18% in June. The increase in money supply was modest in 2Q07 despite historically high credit growth during the quarter. Part of this was due to a decline in net foreign assets, though most of this took place in April and May, as banks increased their foreign liabilities. For its part, June saw one of the largest monthly declines in other net domestic assets which fell by KD 726 million, possibly reflecting unaccounted for private outflows from the system.
In July, the Central Bank of Kuwait (CBK) proceeded to revalue the dinar against the US dollar on two occasions. On July 12 the USD/KD rate was raised by 0.4%. A larger 1.7% increase was implemented on July 25. In early August, the CBK began repricing the rate on a daily basis as it had done prior to 2003 when the US peg was adopted. The CBK policy actions in July come after the central bank ended the currency’s peg to the US dollar and revalued it in late May. The policy followed intense speculation of an eminent revaluation earlier in 2007.
NBK noted that credit growth in June remained strong coming in slightly below a record rise in May. In June alone, credit recorded a KD 651 million increase, sending outstanding balances to KD 17.7 billion. The unyielding appetite for credit was mainly driven by activity in the real estate sector, which rose 5.3% or KD 215 million from the previous month. Personal facilities picked up by KD 206 million in June, posting strong growth for the second straight month following a dip in April. A large part of this growth was in lending for the purchase of securities. The construction sector witnessed similarly strong growth, rising KD 169 million in June after a small decline in May. Credit to non-bank financial institutions witnessed a small decline in June, after maintaining strong growth since the beginning of the year.
The second quarter saw the largest increase in credit on record of KD 1.9 billion. During 2Q07, the main drivers of credit growth was, again, the real estate sector, which received over 38% of net new credit. Lending to non-bank financial institutions and for the purchase of securities were also important beneficiaries of credit growth, as were the construction and trade sectors.
Deposit growth did not fully reflect the strong growth in credit in June nor during 2Q07 in general. Private sector deposits rose KD 170 million in June to reach KD 16.9 billion, following a similar increase in the previous month. However, unlike the previous month, growth was largely in the form of local currency sight deposits, which rose KD 182 million, accompanied by a KD 41 million increase in KD savings deposits. KD time deposits dropped KD 51 million in June following a KD 182 million rise the previous month. Meanwhile, FC deposits were almost unchanged, taking their streak of straight drops to seven months for a cumulative KD 1 billion decline over this period.
NBK also noted that one of the main leakages out of the system during 2Q07 was the large decrease seen in net foreign assets (NFAs) which fell by KD 671 million or 11.5%. The largest part of this was a decline in CBK foreign assets which were down by KD 363 million, while the rest was at local banks. The large decrease in CBK foreign assets followed large increases in 1Q07 which topped KD 1.8 billion, driven in large part by the speculation over the dinar’s exchange rate policy. As the CBK took action to reduce speculation and, subsequently, revalue the KD, speculation subsided and flows began to return to normal.
While CBK foreign assets did continue to decline in June, falling by KD 299 million, the net foreign assets of local banks went the opposite direction, rising by KD 527 million on an increase in foreign assets. As a result, NFAs in June ceased to decline, having instead risen by KD 224 million. Meanwhile, the NFAs of local banks continued to show them as net debtors vis-à-vis non-residents to the tune of KD 342 million, a position they got into in 1Q07 as their foreign assets dropped by KD 977 million and foreign liabilities rose by KD 1.2 billion. In June, NFAs rose for the first time since November 2006, mainly due to a drop in foreign liabilities which broke a seven month trend of unrelenting growth.
Meanwhile, foreign assets of local banks grew KD 487 million, keeping with the pace set in May. Still, despite strong growth over the past three months, foreign assets have only managed to grow KD 90 million since the start of the year, heavily affected by the large drops suffered in the first quarter of 2007. At the end of June, local banks held KD 5.3 billion in foreign assets compared with KD 5.7 billion in foreign liabilities.
According to NBK, the rise in credit facilities and foreign assets lifted total assets of local banks KD 1.04 billion to reach KD 31.7 billion at the end of June. The increase was not matched by liquid assets, which saw a KD 392 million drop in cash and balances with CBK, on the back of a KD 232 million decline in time deposits with the CBK. The ratio of liquid assets (net of local interbank placements) to total assets declined to 16.1% from 18.1% in May.
KD interbank rates (KIBOR) sustained heavy drops in June as CBK action to reduce rates continued to be felt throughout the system. Declines ranged between 68 and 117 basis points (bps) for various maturities, with the larger drops affecting shorter maturities. The yields on 1, 3, 6, and 12-month local interbank placements averaged 4.10%, 4.38% 4.69%, and 5.03%, respectively. The large drops caused KIBOR to drop below US dollar Libor rates for the first time in almost two years, with the spread falling by 100 bps for the 3-month maturity and 85 bps for the 6-month maturity to 98 bps and 69 bps, respectively, in favor of the Libor rates.
Customer deposit rates also fell for a third consecutive month, albeit by a smaller magnitude than KIBOR rates. The drops ranged between 8 bps and 15 bps, as the average rates paid on KD deposits averaged 5.03%, 5.32%, 5.36%, and 5.39% for 1, 3, 6, and 12-month maturities, respectively. Falling interest rates helped push the weighted average cost of KD deposits down by 3 bps to 4.02%.
