I was going to leave Kuwait until the end of my GCC outlook marathon, but due to the new government-spending plan I decided to bump it in front of the UAE.
Kuwait’s GDP is expected to grow the least in the region, from a 1.3% contraction last year to a 2.5% growth in 2010. This year’s GDP is expected to be around KD32 billion.
Political conflicts remain the greatest concern not only for local investors, but also international ones. As a matter of fact, Kuwait is the only country in the MENA region that is expected to show FDI outflows.
Although Kuwait has the slowest growth in GDP, major political issues, and overall negative sentiment; it has the second highest fiscal surplus in the MENA region. This year is no different from any other year as there always has been a surplus, but the only difference this time is that a government-spending plan is going to be implemented.
We all heard the news that came out last week about the KD4.78 billion government spending plan that’s going to be implemented in the FY2010/11. The main content of this plan is to enrich the private sector by projects which include a warehousing company, health insurance company, low-cost building company, the famous Khairan City, and an electric utility company.
I hope I’m not too optimistic but this plan should at least improve the total macro outlook of the country.
Banking Sector
A major concern I have for Kuwait is the banking sector. Provisions will continue throughout the year as the quality of loans is still questionable. In 2009, more than 30% of the bank’s loan book is attributed to personal loans, whereas 54% of the personal loans are paid on installments. In addition to that, about 30% of the money borrowed is used to purchase securities in the market.
Another 30% of the loans are given to the constructions and real estate sector, a sector doesn’t look very promising right now with current conditions. The highly leveraged commercial real estate market in Kuwait grew much faster than the demand. This will affect the cash-flows expected from these projects sparking a potential default on loans outstanding. For more details on this subject read “Got-Tenants?”.
These risks are not reflected in the stock prices as Kuwait’s banking sector is trading at a premium to GCC banks in terms of P/E. Banks in Saudi Arabia, UAE and Qatar are all trading a discount to Kuwaiti ones by an average of 60%.
The aggregated losses of all listed companies in the Kuwait SE equalled USD 11.3 billion (KD 3.2 billion). This means that it will take us 2.8 normalized quarters of USD 4 billion each, or 8.3 quarters of USD 1.37 billion which were recorded in 2Q ’09 to recover the losses.For more details on this subject read “How bad was Q4 2008“
There are many negative catalysts on Kuwait’s story; nevertheless, this outlook can turn around if the spending plan was properly implemented. My verdict? Neutral on kuwait
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