The Kuwaiti stock market has fallen 58.6% from its 52 week high and
closed at record lows. 2009 wasn’t as merciful as many have thought or
at least hoped, as YTD the index fell 15%. I clearly remember a hot July
day; roads were empty and everyone was away on their summer vacation. My
dad called me to ask the question that was soon to be the icebreaker of
every other conversation, “what’s happening to the market and when is it
gonna stop?!” It seems that at that time everyone knew the answer; it
was just a temporary condition driven by lower trading volume due to the
usual low market activity during the summer and the Zain capital issue
that had pulled much liquidity from the market. Who would have imagined
that the index would reach the 6000 level? We always though that we were
immune from what was happening around the globe as we have been taught
through out our business education that diversification lowers your
systematic risk and that the U.S market has no correlation with the GCC
markets; that idea was proven wrong as this severe recession affected
all sectors in all markets. Now for me to explain the relation between
the local markets and the global markets it has to be in another post
later on, but let me stick to my point and simply explain what’s
happening in Kuwait and what measures are taken to resolve these issues.
The collapse of the Kuwaiti market was due to the mix of decreasing oil
prices and financial sector de-leveraging. We have a special case here
in Kuwait, where relatively speaking the economy is in a stable state
and the financial/real estate sectors are beaten badly. In contrast to
other economies, 90% of Kuwaitis work in the government/government
related entities. So, an increase in unemployment doesn’t affect the
demand as in other countries, but this picture is not reflected in the
stock market where the decline is severe.
At times of growth and ease accessibility to credit, many investment
firms took an initiative of seek alpha through excess leverage.
Unfortunately, when there was a squeeze in liquidity; many investment
firms mismatched their assets and liabilities causing them to default on
their loans. Solvency issues were raised and many firms were forced to
sell their assets which mostly comprised of listed equities and real
estate which dragged those markets further down.
Another case that kept the chain reaction going is that many non-
financial firms saw the increase in the equity market as an opportunity
to catch up with the high growth momentum. Shareholders started to
demand extraordinary growth rates, so companies directed a big chunk of
their assets directly into the market or through mutual funds. In
addition, the average Kuwaiti household is very much exposed to the
stock market as those financial firms, many of which entered the market
by taking personal loans and/or buying on margin. Thus, the
deterioration of the market eroded the assets of many financial,
non-financial companies and households. These circumstances led to
unfavorable credit qualities at banks. Further, the uncertainty of
collaterals provided by borrowers resulted in a tightening of credit
policies and an unwillingness to lend, thus, demanding high prices for
loans. That has also affected the companies that have no solvency
problems nor are exposed to the equity market.
Yet, in Kuwait we still have a different case. We don’t have to go
through this trauma. As many might disagree with me and argue that let
the invisible hand work do its job and don’t let the government breach
the capitalist system, I believe that if the government doesn’t
interfere we will have a more gloomy future.
Various literature estimates that KIA has $300bn worth of assets and the
total loans of the investment companies combined is a little over $30bn (Source: Central Bank of Kuwait).
To translate this in easier words rather than numbers, let us say that
even if all investment companies were unable to meet their loan
obligations, the KIA can bail them out. There are two ways to deal with
this case, either by recapitalizing the investment companies or by using
the funds to stabilize the equity market to stop the downward pressure
on assets and the forced selling. Personally, I would choose the former
instead of the later because they are too late to support the market as
investors have no confidence in the market anymore.
Some regulators see that bailing out investment companies is a waste of
public funds. The Kuwaiti Central Bank Governor stated in Arab Times on
the Jan 18 issue: “It is also useful for us to see from investment
companies plans to resolve their situation rather than leaving it to the
state… banks are different from investment companies. Bank balance
sheets include deposits. Investment companies have no deposits.”
So, this keeps me wondering: What’s the future of local investment
firms? Will they cease to exist or not?
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