Published: April 1, 2009
Kuwait’s government has approved a US$5.2bn aid package to stimulate the economy.
The fiscal stimulus plan focuses on supporting the country’s ailing investment companies. Kuwait investment companies have lost KD9.2bn (US$32bn) from the start of the global financial crisis last August to the end of the January.
The acting finance minister, Mustafa Al-Shamali, is quoted by local media, saying that the whole nation is currently witnessing the most turbulent period in its history, indicating “we need the economic stimulus bill to protect the stock market, national companies and citizens”.
The Central Bank of Kuwait said overall capital of conventional and Islamic companies at the end of January stood at KD20.8bn, compared to KD30bn in July. The main reason behind the slump was the heavy loss of the companies’ portfolios on the Kuwait Stock Exchange, which witnessed a 42% drop since its peak in June 2008.
Tristan Cooper, sovereign analyst for Kuwait at Moody’s, explains: “The package follows the establishment in December of a US$5bn fund to support the local stock market. Meanwhile, the parliament has been pressuring the government to expand a separate fund to relieve indebted Kuwaiti citizens.”
The stimulus package is said to help struggling investment companies by offering loan guarantees. The political instability in the country delayed the bailout plan. In the middle of March, the cabinet resigned just two months after it was formed. The council was asked to continue in a caretaker capacity until a new government is formed.
In the past, Kuwait’s economy has been relying heavily on oil. With the heavy slowdown in the demand of real estate and the oil price coming down to US$42 from the highs of last year’s average of US$78, Kuwait has been hit hard.
Cooper says that “Kuwait’s GDP per capita is expected to contract in 2009 owing to the steep fall in oil prices last year but will remain highly placed on the global scale. We forecast that GDP will shrink by 0.8% in 2009.”
According to Stathis Kyriakides, analyst at Moody’s, the stimulus package was discussed for quite some time. Now that the parliament has resigned, the package has been pushed through by the government under a legislation which allows the emir to act on “necessary” matters when parliament is not in session or dissolved. The country’s finance minister, Mustafa Al Shamali, told local media that the “economic situation as well as public opinion” were pushing for quick action over the stimulus package.
Kyriakides explains: “There was tension between the government and the parliament for some time now. Kuwait has had three governments in three years. This did make the decision-making process a little bit difficult. A number of projects had to be cancelled, the partnership with US Dow Chemical for example, or the US$15bn project to build a new refinery. There were some difficulties in pushing reforms through.”
“The stimulus package is going to put confidence into the system,” says Kyriakides. “Beyond that it is difficult to see whether it will actually stimulate growth. What it appears to do is provide a safety net for the banking sector, which, quite frankly, was already there.”
The government has already bailed out Gulf Bank in autumn last year. It was the first Middle Eastern bank to require government bailout.