Ananthakrishnan Prasad - Euromoney Conferences

The Euromoney Kuwait Conference
April 8, 2013
A.Prasad
International Monetary Fund

Key messages
Kuwait is now at crossroads of conserving wealth
for future generations
Need to design a fiscal framework for the long term
Strengthen the macroprudential framework
Formal mandate
Formal coordination among regulators
Strengthen instruments
Strengthen monetary transmission
Develop domestic debt markets

Kuwait—Economic Performance

High oil prices have benefited Kuwait
Current Account Balance, 2006–12
(Percent of GDP; unless otherwise specified)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Total Oil (In millions of barrels/year)
Current Account Balance (In percent of GDP - RHS)
Crude oil (US$ per barrel - RHS)
2006 2007 2008 2009 2010 2011 2012
Sources: Bloomberg; country authorities; and IMF staff calculations.
140
120
100
80
60
40
20
0

Economic performance has been
relatively strong
Kuwait Economic Indicators, 2006 to 2012
KWT GCC KWT GCC
Nominal GDP (U.S. dollar billions) 125.1 1,077.1 173.4 1,547.1
Real GDP Growth 1 (percent) 2.1 6.4 5.1 6.0
Real Non-Oil GDP Growth (percent) 3.3 8.2 2.7 6.3
Inflation (percent) 5.3 5.3 2.9 2.6
Current Account Balance (U.S. $b) 47.5 198.9 63.3 354.6
Current Account Balance (% GDP) 41.9 18.3 34.2 22.9
Fiscal Balance (% GDP) 29.2 13.1 30.6 14.5
Sources: Country authorities; and IMF staff calculations.
1 GCC growth averages are weighted using PPPGDP.
2006 –11 Average 2012

Fiscal policy continues to be supportive
100
90
80
70
60
50
40
30
Non-oil deficit to non-oil GDP (FY, Percent)1
Government expenditure (FY, KD billions, RHS)1
2007 2008 2009 2010 2011 2012
13
12
11
10
9
8
7
6
5

Fiscal break even prices have increased, but
is relatively low
Fiscal Vulnerability Rising
(U.S. dollars per barrel) 1
Fiscal breakeven price, 2012
160
140
120
100
80
60
40
20
Change in WEO oil price,
2008-12: $9
Iraq
Qatar
Oman
Kuwait
Bahrain
Saudi Arabia
Algeria
Libya
Iran
WEO oil price, 2012: $106
United Arab Emirates
0
-10 0 10 20 30 40 50 60 70
Change in fiscal breakeven price, 2008–12
Sources: National authorities; and IMF staff calculations.

Fiscal vulnerability to a lower oil price
has, however, increased
Fiscal Balances Sensitive To Oil Prices
(Kuwait overall fiscal balance, percent of GDP)
60
50
40
30
20
10
0
-10
2004 2006 2008 2010 2012 2014 2016 2018
Sources: National authorities; and IMF staff estimates.
Note: Shaded area shows fiscal balance for the oil price up to US$28 (one standard deviation) higher or lower than the forecast oil price.
60
50
40
30
20
10
0
-10

Kuwait is now at crossroads of conserving
wealth for future generations
Oil Fiscal Revenues and Total Government Expenditure,
1980/81–2018/19
(KD millions)
35
30
25
20
15
10
5
0
Oil revenues Total expenditure
Sources: Country authorities; and IMF staff estimates.
35
30
25
20
15
10
5
0

Increase resilience and create private-sector jobs
Accommodative fiscal and
monetary policy
Large government wage bill
increases
High oil prices, but
sensitive to global
economic developments
oModest GDP growth
oLarge current account surpluses
oIncreasing fiscal vulnerability to oil price
Gradually save more and reduce spending rigidities
Recovery in Libya

Need to design a fiscal framework for
the long term
Multi-year budget framework useful to delink the budget from the volatility
of oil prices
Informed by a macro-fiscal unit
A fiscal rule would be useful for long-term fiscal management
Volatility of revenue and intergenerational equity considerations

Financial Sector Performance

3
2.5
2
1.5
1
0.5
0
Banking soundness indicators are favorable
Assets/GDP (*)
Bahrain Kuwait U.A.E. Qatar Saudi
Arabia
Return on Assets
3
2.5
2
1.5
1
0.5
0
Qatar 2/ Saudi
Arabia
Oman
Oman U.A.E. Bahrain Kuwait
1/
Source: Country authorities.
(*) As of Q3 2011
1/ For all indicators except Assets/GDP, latest data available is Dec 2011.
2/ Data is for June 2012.
2.5
2
1.5
1
0.5
0
3
2.5
2
1.5
1
0.5
0
Capital Adequacy Ratio
25
20
15
10
5
0
U.A.E. Qatar 2/ Bahrain Kuwait
1/
Return on Equity
18
16
14
12
10
8
6
4
2
0
Qatar Saudi
Arabia
Saudi
Arabia
Oman
Oman U.A.E. Bahrain Kuwait
1/
25
20
15
10
5
0
25
20
15
10
5
0
Provisions/NPLs
140
120
100
80
60
40
20
0
Saudi
Arabia
Oman Kuwait Qatar U.A.E. Bahrain
Non Performing Loans/Total Loans
9
8
7
6
5
4
3
2
1
0
U.A.E. Kuwait
1/
Bahrain Oman Saudi
Arabia
Qatar 2/
140
120
100
80
60
40
20
0
10
9
8
7
6
5
4
3
2
1
0

Investment companies are deleveraging…
50
40
30
20
10
0
Conventional investment companies
Islamic investment companies
Local banks
Total of investment companies including
fiduciary
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Central Bank of Kuwait.
Assets of Investment Companies and Banks
(KD billions)
50
40
30
20
10
0

Limited monetary policy independence and persistent structural
liquidity surpluses in upswings hinder containing credit expansion
8
6
4
2
0
Jan-
04
8
6
4
2
0
Jan-
04
Jan-
05
Jan-
05
Jan-
06
Jan-
06
Jan-
07
Jan-
07
Bahrain
Jan-
08
3-month Interbank Rate
Federal Fund Target Rate
Jan-
09
Qatar
Jan-
08
Jan-
10
Jan-
11
Figure . GCC: Domestic and U.S. Interbank Rates
Jan-
12
3-month Interbank Rate
Federal Fund Target Rate
Jan-
09
Jan-
10
Jan-
11
Jan-
12
8
6
4
2
0
Jan-
04
8
6
4
2
0
Jan-
04
Jan-
05
Jan-
05
Jan-
06
Jan-
06
Jan-
07
Jan-
07
Kuwait
Jan-
08
Jan-
09
Saudi Arabia
Jan-
08
3-month Interbank Rate
Federal Fund Target Rate
Jan-
10
Jan-
11
Jan-
12
3-month Interbank Rate
Federal Fund Target Rate
Jan-
09
Jan-
10
Jan-
11
Jan-
12
8
6
4
2
0
Jan-
04
8
6
4
2
0
Jan-
04
Jan-
05
Jan-
05
Jan-
06
Jan-
06
Jan-
07
Jan-
07
Oman
Jan-
08
Overnight Interbank Rate
Federal Fund Target Rate
Jan-
09
U.A.E.
Jan-
08
Jan-
09
Jan-
10
Jan-
10
Jan-
11
Jan-
11
Jan-
12
3-month Interbank Rate
Federal Fund Target Rate
Jan-
12

Strengthen the macroprudential framework
Putting in place the institutional and legal framework
Central bank best suited for the financial stability mandate
Strengthening the macroprudential analysis
Identification of systemic risk
Publishing financial stability reports
Setting up early-warning systems
Setting a formal mechanism of coordination or
consultation across policies aimed at financial stability
Choosing the appropriate macroprudential instruments

Monetary Transmission

Reserve requirements and central bank CDs constitute the
main instruments to manage liquidity…
Central Bank Deposits and Securities
(U.S. dollar billions)
80
70
60
50
40
30
20
10
0
Deposits with
Central Bank
Central Bank
Securities
Oman Saudi Arabia UAE
Source: Country authorities.
80
70
60
50
40
30
20
10
0
Central Bank Deposits and T-Bills
(U.S. dollar billions)
18
16
14
12
10
8
6
4
2
0
Deposits with Central Bank
T-Bills
Bahrain Kuwait Qatar
Source: Country authorities.
18
16
14
12
10
8
6
4
2
0

Government bond issuances in GCC countries have been low
Banks' Investment in Government Bonds
(U.S. dollar billions)
30
25
20
15
10
5
0
Bahrain Kuwait Oman Qatar Saudi
Arabia
Source: Country authorities.
UAE
30
25
20
15
10
5
0

14
12
10
8
6
4
2
Interest rate pass-through has been low…
0
Jan- Jan- Jan- Jan- Jan- Jan-
04 05 06 07 08 09
1\ Time deposit rate (3 months).
14
12
10
8
6
4
2
Source: Haver and country authorities.
Figure . GCC: Interbank and Retail Interest Rates
Bahrain
3-month Interbank Rate
Deposit Rate 1\
Lending Rate
Oman
Jan-
10
0
Jan- Jan- Jan- Jan- Jan- Jan- Jan-
04 05 06 07 08 09 10
1\ Time deposit rate (weighted average).
Jan-
11
Overnight Interbank Rate
Deposit Rate 1\
Lending Rate
Jan-
11
Jan-
12
Jan-
12
14
12
10
8
6
4
2
0
Jan- Jan- Jan- Jan-
04 05 06 07
1\ Weighted average.
16
14
12
10
8
6
4
2
Kuwait
3-month Interbank Rate
Deposit Rate 1\
Lending Rate
Jan-
08
Qatar
Jan-
09
0
Jan- Jan- Jan- Jan- Jan- Jan-
04 05 06 07 08 09
1\ One year time deposit rate.
Jan-
10
Jan-
11
3-month Interbank Rate
Deposit Rate 1\
Lending Rate
Jan-
10
Jan-
11
Jan-
12
Jan-
12
Pass-through to retail
rates lower and slower
Reflecting market
frictions and
regulations
Limiting monetary
policy transmission

Policy implications
Continued efforts to develop domestic financial markets
should be the key focus for:
Effective monetary operations and liquidity management,
which requires liquidity forecasting
Increasing interest rate pass-through
Strengthening monetary policy transmission

Finally, developing local debt
market brings important benefits
Government securities market is needed to:
establish a benchmark yield curve
create new financial products
enhance monetary transmission and liquidity
management
help banks fulfill Basel III liquidity requirements
Government/central bank should take the lead to in
developing the legal, institutional and regulatory
infrastructure.