Ananthakrishnan Prasad - Euromoney Conferences
Ananthakrishnan Prasad - Euromoney Conferences
Ananthakrishnan Prasad - Euromoney Conferences
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The <strong>Euromoney</strong> Kuwait Conference<br />
April 8, 2013<br />
A.<strong>Prasad</strong><br />
International Monetary Fund
Key messages<br />
Kuwait is now at crossroads of conserving wealth<br />
for future generations<br />
Need to design a fiscal framework for the long term<br />
Strengthen the macroprudential framework<br />
Formal mandate<br />
Formal coordination among regulators<br />
Strengthen instruments<br />
Strengthen monetary transmission<br />
Develop domestic debt markets
Kuwait—Economic Performance
High oil prices have benefited Kuwait<br />
Current Account Balance, 2006–12<br />
(Percent of GDP; unless otherwise specified)<br />
1,800<br />
1,600<br />
1,400<br />
1,200<br />
1,000<br />
800<br />
600<br />
400<br />
200<br />
0<br />
Total Oil (In millions of barrels/year)<br />
Current Account Balance (In percent of GDP - RHS)<br />
Crude oil (US$ per barrel - RHS)<br />
2006 2007 2008 2009 2010 2011 2012<br />
Sources: Bloomberg; country authorities; and IMF staff calculations.<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0
Economic performance has been<br />
relatively strong<br />
Kuwait Economic Indicators, 2006 to 2012<br />
KWT GCC KWT GCC<br />
Nominal GDP (U.S. dollar billions) 125.1 1,077.1 173.4 1,547.1<br />
Real GDP Growth 1 (percent) 2.1 6.4 5.1 6.0<br />
Real Non-Oil GDP Growth (percent) 3.3 8.2 2.7 6.3<br />
Inflation (percent) 5.3 5.3 2.9 2.6<br />
Current Account Balance (U.S. $b) 47.5 198.9 63.3 354.6<br />
Current Account Balance (% GDP) 41.9 18.3 34.2 22.9<br />
Fiscal Balance (% GDP) 29.2 13.1 30.6 14.5<br />
Sources: Country authorities; and IMF staff calculations.<br />
1 GCC growth averages are weighted using PPPGDP.<br />
2006 –11 Average 2012
Fiscal policy continues to be supportive<br />
100<br />
90<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
Non-oil deficit to non-oil GDP (FY, Percent)1<br />
Government expenditure (FY, KD billions, RHS)1<br />
2007 2008 2009 2010 2011 2012<br />
13<br />
12<br />
11<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5
Fiscal break even prices have increased, but<br />
is relatively low<br />
Fiscal Vulnerability Rising<br />
(U.S. dollars per barrel) 1<br />
Fiscal breakeven price, 2012<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
Change in WEO oil price,<br />
2008-12: $9<br />
Iraq<br />
Qatar<br />
Oman<br />
Kuwait<br />
Bahrain<br />
Saudi Arabia<br />
Algeria<br />
Libya<br />
Iran<br />
WEO oil price, 2012: $106<br />
United Arab Emirates<br />
0<br />
-10 0 10 20 30 40 50 60 70<br />
Change in fiscal breakeven price, 2008–12<br />
Sources: National authorities; and IMF staff calculations.
Fiscal vulnerability to a lower oil price<br />
has, however, increased<br />
Fiscal Balances Sensitive To Oil Prices<br />
(Kuwait overall fiscal balance, percent of GDP)<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
2004 2006 2008 2010 2012 2014 2016 2018<br />
Sources: National authorities; and IMF staff estimates.<br />
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.<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10
Kuwait is now at crossroads of conserving<br />
wealth for future generations<br />
Oil Fiscal Revenues and Total Government Expenditure,<br />
1980/81–2018/19<br />
(KD millions)<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Oil revenues Total expenditure<br />
Sources: Country authorities; and IMF staff estimates.<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0
Increase resilience and create private-sector jobs<br />
Accommodative fiscal and<br />
monetary policy<br />
Large government wage bill<br />
increases<br />
High oil prices, but<br />
sensitive to global<br />
economic developments<br />
oModest GDP growth<br />
oLarge current account surpluses<br />
oIncreasing fiscal vulnerability to oil price<br />
Gradually save more and reduce spending rigidities<br />
Recovery in Libya
Need to design a fiscal framework for<br />
the long term<br />
Multi-year budget framework useful to delink the budget from the volatility<br />
of oil prices<br />
Informed by a macro-fiscal unit<br />
A fiscal rule would be useful for long-term fiscal management<br />
Volatility of revenue and intergenerational equity considerations
Financial Sector Performance
3<br />
2.5<br />
2<br />
1.5<br />
1<br />
0.5<br />
0<br />
Banking soundness indicators are favorable<br />
Assets/GDP (*)<br />
Bahrain Kuwait U.A.E. Qatar Saudi<br />
Arabia<br />
Return on Assets<br />
3<br />
2.5<br />
2<br />
1.5<br />
1<br />
0.5<br />
0<br />
Qatar 2/ Saudi<br />
Arabia<br />
Oman<br />
Oman U.A.E. Bahrain Kuwait<br />
1/<br />
Source: Country authorities.<br />
(*) As of Q3 2011<br />
1/ For all indicators except Assets/GDP, latest data available is Dec 2011.<br />
2/ Data is for June 2012.<br />
2.5<br />
2<br />
1.5<br />
1<br />
0.5<br />
0<br />
3<br />
2.5<br />
2<br />
1.5<br />
1<br />
0.5<br />
0<br />
Capital Adequacy Ratio<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
U.A.E. Qatar 2/ Bahrain Kuwait<br />
1/<br />
Return on Equity<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Qatar Saudi<br />
Arabia<br />
Saudi<br />
Arabia<br />
Oman<br />
Oman U.A.E. Bahrain Kuwait<br />
1/<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Provisions/NPLs<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
Saudi<br />
Arabia<br />
Oman Kuwait Qatar U.A.E. Bahrain<br />
Non Performing Loans/Total Loans<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
U.A.E. Kuwait<br />
1/<br />
Bahrain Oman Saudi<br />
Arabia<br />
Qatar 2/<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0
Investment companies are deleveraging…<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Conventional investment companies<br />
Islamic investment companies<br />
Local banks<br />
Total of investment companies including<br />
fiduciary<br />
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012<br />
Source: Central Bank of Kuwait.<br />
Assets of Investment Companies and Banks<br />
(KD billions)<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0
Limited monetary policy independence and persistent structural<br />
liquidity surpluses in upswings hinder containing credit expansion<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan-<br />
04<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan-<br />
04<br />
Jan-<br />
05<br />
Jan-<br />
05<br />
Jan-<br />
06<br />
Jan-<br />
06<br />
Jan-<br />
07<br />
Jan-<br />
07<br />
Bahrain<br />
Jan-<br />
08<br />
3-month Interbank Rate<br />
Federal Fund Target Rate<br />
Jan-<br />
09<br />
Qatar<br />
Jan-<br />
08<br />
Jan-<br />
10<br />
Jan-<br />
11<br />
Figure . GCC: Domestic and U.S. Interbank Rates<br />
Jan-<br />
12<br />
3-month Interbank Rate<br />
Federal Fund Target Rate<br />
Jan-<br />
09<br />
Jan-<br />
10<br />
Jan-<br />
11<br />
Jan-<br />
12<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan-<br />
04<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan-<br />
04<br />
Jan-<br />
05<br />
Jan-<br />
05<br />
Jan-<br />
06<br />
Jan-<br />
06<br />
Jan-<br />
07<br />
Jan-<br />
07<br />
Kuwait<br />
Jan-<br />
08<br />
Jan-<br />
09<br />
Saudi Arabia<br />
Jan-<br />
08<br />
3-month Interbank Rate<br />
Federal Fund Target Rate<br />
Jan-<br />
10<br />
Jan-<br />
11<br />
Jan-<br />
12<br />
3-month Interbank Rate<br />
Federal Fund Target Rate<br />
Jan-<br />
09<br />
Jan-<br />
10<br />
Jan-<br />
11<br />
Jan-<br />
12<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan-<br />
04<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan-<br />
04<br />
Jan-<br />
05<br />
Jan-<br />
05<br />
Jan-<br />
06<br />
Jan-<br />
06<br />
Jan-<br />
07<br />
Jan-<br />
07<br />
Oman<br />
Jan-<br />
08<br />
Overnight Interbank Rate<br />
Federal Fund Target Rate<br />
Jan-<br />
09<br />
U.A.E.<br />
Jan-<br />
08<br />
Jan-<br />
09<br />
Jan-<br />
10<br />
Jan-<br />
10<br />
Jan-<br />
11<br />
Jan-<br />
11<br />
Jan-<br />
12<br />
3-month Interbank Rate<br />
Federal Fund Target Rate<br />
Jan-<br />
12
Strengthen the macroprudential framework<br />
Putting in place the institutional and legal framework<br />
Central bank best suited for the financial stability mandate<br />
Strengthening the macroprudential analysis<br />
Identification of systemic risk<br />
Publishing financial stability reports<br />
Setting up early-warning systems<br />
Setting a formal mechanism of coordination or<br />
consultation across policies aimed at financial stability<br />
Choosing the appropriate macroprudential instruments
Monetary Transmission
Reserve requirements and central bank CDs constitute the<br />
main instruments to manage liquidity…<br />
Central Bank Deposits and Securities<br />
(U.S. dollar billions)<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Deposits with<br />
Central Bank<br />
Central Bank<br />
Securities<br />
Oman Saudi Arabia UAE<br />
Source: Country authorities.<br />
80<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
Central Bank Deposits and T-Bills<br />
(U.S. dollar billions)<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Deposits with Central Bank<br />
T-Bills<br />
Bahrain Kuwait Qatar<br />
Source: Country authorities.<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0
Government bond issuances in GCC countries have been low<br />
Banks' Investment in Government Bonds<br />
(U.S. dollar billions)<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Bahrain Kuwait Oman Qatar Saudi<br />
Arabia<br />
Source: Country authorities.<br />
UAE<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
Interest rate pass-through has been low…<br />
0<br />
Jan- Jan- Jan- Jan- Jan- Jan-<br />
04 05 06 07 08 09<br />
1\ Time deposit rate (3 months).<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
Source: Haver and country authorities.<br />
Figure . GCC: Interbank and Retail Interest Rates<br />
Bahrain<br />
3-month Interbank Rate<br />
Deposit Rate 1\<br />
Lending Rate<br />
Oman<br />
Jan-<br />
10<br />
0<br />
Jan- Jan- Jan- Jan- Jan- Jan- Jan-<br />
04 05 06 07 08 09 10<br />
1\ Time deposit rate (weighted average).<br />
Jan-<br />
11<br />
Overnight Interbank Rate<br />
Deposit Rate 1\<br />
Lending Rate<br />
Jan-<br />
11<br />
Jan-<br />
12<br />
Jan-<br />
12<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
Jan- Jan- Jan- Jan-<br />
04 05 06 07<br />
1\ Weighted average.<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
Kuwait<br />
3-month Interbank Rate<br />
Deposit Rate 1\<br />
Lending Rate<br />
Jan-<br />
08<br />
Qatar<br />
Jan-<br />
09<br />
0<br />
Jan- Jan- Jan- Jan- Jan- Jan-<br />
04 05 06 07 08 09<br />
1\ One year time deposit rate.<br />
Jan-<br />
10<br />
Jan-<br />
11<br />
3-month Interbank Rate<br />
Deposit Rate 1\<br />
Lending Rate<br />
Jan-<br />
10<br />
Jan-<br />
11<br />
Jan-<br />
12<br />
Jan-<br />
12<br />
Pass-through to retail<br />
rates lower and slower<br />
Reflecting market<br />
frictions and<br />
regulations<br />
Limiting monetary<br />
policy transmission
Policy implications<br />
Continued efforts to develop domestic financial markets<br />
should be the key focus for:<br />
Effective monetary operations and liquidity management,<br />
which requires liquidity forecasting<br />
Increasing interest rate pass-through<br />
Strengthening monetary policy transmission
Finally, developing local debt<br />
market brings important benefits<br />
Government securities market is needed to:<br />
establish a benchmark yield curve<br />
create new financial products<br />
enhance monetary transmission and liquidity<br />
management<br />
help banks fulfill Basel III liquidity requirements<br />
Government/central bank should take the lead to in<br />
developing the legal, institutional and regulatory<br />
infrastructure.