Global Arab Network | Bailout debate - Business leaders urging Kuwait to buy risky assets affecting banks

Translate this article to your language:

GANPublications

e-Publications

Add Site to Favorites

Add Page to Favorites

Make Homepage

Share This Page

RSS Feed

--------------------------------------------------------------------------------------------------------------------
| |

Bailout debate - Business leaders urging Kuwait to buy risky assets affecting banks

Wednesday, 04 August 2010 15:10

While Kuwait’s banks avoided the extremes of the global economic downturn, their exposure to international markets through investment firms continues to have an adverse impact.

Business leaders are now urging Kuwait’s government to step in and buy the risky assets affecting banks’ stability. However, they say parliament’s plans for a complete bailout of consumer debt would be an intervention too far.

With the government-controlled energy sector dominating the economy, local banks were underexposed to lending for domestic industry, among other sectors. Debt was instead focused on investment firms and real estate projects, which both took a major hit during the crisis.

During the boom period preceding the downturn, with excess liquidity and a strong appetite for returns, over 100 Kuwaiti investment firms were licensed. Many used short-term borrowing to finance long-term investments, resulting in a maturities mismatch when funding froze and projects faced delays.

Despite the crisis, these investment companies still hold healthy assets on and off their balance sheets worth more than 100% of GDP, while Kuwait’s banks are also exposed, although to a lesser degree. This has led to increasing calls for government action.

“Some of the companies with problems in the past few years simply miscalculated their short-term assets at the time of the credit crunch,” Sadoun A Ali, the CEO of KIPCO Asset Management Company (KAMCO), told OBG. “They still have good long-term assets and a solid business model, but are unable to get new funding as the market has frozen.”

So far, the government’s main intervention in support of struggling investment firms has been the Financial Stability Law of 2009, which covered bankruptcy protection and credit provision. However, the financial community says the law is not fully tested and its terms are too strict, so a wider effort to bolster liquidity is needed.

Business leaders say that a government-backed fund for repurchase to buy toxic assets needs to be set up, arguing that a repo fund would be more effective than stepping in when companies face immediate bankruptcy.

“The government is sitting on surplus money. A ‘good asset’ fund would provide solid companies with a way to secure funds to pay off bad debts. Once they have successfully restructured themselves, they can then repurchase their good assets back from the government,” KAMCO’s Ali told OBG

While Kuwait’s financial community and many economists commend the notion of a government-supported repo fund, a major obstacle lies in gaining the support of parliament, which often favours populist polices.

Kuwait is considered a “cradle-to-grave” welfare state, with citizens benefiting from the country’s oil wealth through free and subsidised services, and sometimes direct financial support. There is a strong mindset among Kuwaitis, backed by the constitution, that the state’s oil reserves and in turn the treasury belong to the people.

Parliament has proposed several times over the past 18 months to buy all consumer debt at a cost of more than $20bn, with the principal owed forgiven and interest payments rescheduled over a longer term. The government has vetoed the proposal each time, but the assembly could potentially override this if another vote produces a two-thirds majority.

Under the proposal only Kuwaiti nationals – who comprise around one-third of the country’s 3.4m residents – would benefit from the scheme. Economists say that high living standards among citizens mean that a consumer relief package would not have the multiplier effect of stimulus spending on infrastructure. It could lead to defaults by borrowers who can afford loan payments but choose not to make them.

Another perhaps more long-term damaging effect feared by economists is that a consumer bailout could create an attitude amongst Kuwaitis that sound financial planning is unimportant and that when things go awry, the government will always be there to bail them out.

“It rewards bad behaviour, and could result in good borrowers being tempted to become bad ones,” said Michael Accad, the CEO of Gulf Bank. “Government money would be far more productively spent on infrastructure projects.”

Global Arab Network

This article is published in partnership with Oxford Business Group

Add comment

The opinions of the authors in articles published are theirs alone and do not necessarily reflect the views of Global Arab Network
------------------------------------------------------------------------------
Published comments are the opinions of private individuals and do not reflect the views of Global Arab Network