Dubai: Kuwait’s banking sector is well regulated and has remained sound and credit conditions favorable amid challenging economic conditions.

In the first half of 2017, credit to the private sector recorded healthy average growth, after taking a hit in late 2016 due to weakening consumer confidence. The banking sector had a capital adequacy ratio of 18.6 per cent in the first quarter of 2017, nonperforming loans ratio of 2.5 per cent, and provisioning ratio (general and specific) of above 200 per cent, while banks continue to be highly profitable.

Unlike central banks in other GCC countries, the CBK kept its policy rate at 2.75 per cent despite the Fed’s hike of 25 basis points (bps) in June of this year. The Kuwaiti Dinar 3-months interbank rate rose by 12 bps and the spread with the 3-months LIBOR [Londong interbank offered rate] remained at 45bps during the first seven months of this year, as compared to 82bps in the same period of last year. Part of the relatively modest flexibility in monetary policy is due to the fact that the Kuwaiti dinar is pegged to a basket of undisclosed currencies (which include the US dollar and the Euro). However, IIF analysts expect CBK to increase its policy rate with the next FED rate increase, which they anticipate will take place by the end of this year.

With the sharp fall in oil prices, the current account shifted from a surplus of about $54 billion in 2014 to a deficit of $5 billion in 2016. Although the dinar is unlikely to face any serious challenge in the near future, analysts say the squeeze on current account has limited the resident capital outflows, largely in the form of equities and foreign investment abroad.

First time in two decades the current account slipped into a deficit in 2016 (Chart 3). Between 1995 and 2015, Kuwait’s current account recorded average surplus of 28 per cnet of GDP, helping the country increase its sovereign wealth fund (foreign assets of the Kuwait Investment Fund) to over $600 billion in recent years (equivalent to around five times of Kuwait’s GDP).

“We expect the current account to shift back to a small surplus of 0.6 per cent GDP in 2017 helped by the gradual recovery in oil prices. Unlike in other GCC countries, growth in imports in Kuwait remain strong supported by strong domestic demand for capital and industrial goods. Albeit lower in the past two years, portfolio outflows held strong, reflecting investments channeled through the Future Generation Fund (FGF). Going forward, we expect net flows to retreat to negative range as the current account improves,” said Garbis Iradian, Chief Economist, MENA of IIF.

Analysts see both e downside and upside risks to the outlook. On the downside, possible implementation delays in capital projects due to political frictions in the parliament can negatively impact growth prospects. Opposition to reforms by some of the lawmakers could delay progress in implementing the New Development Plan. Also, much lower oil prices may lead to stronger fiscal consolidation and weaker private investment. On the upside, the Public-Private Partnership agreements and capital projects have a potential to attract more foreign capital and expertise, thus helping non-oil sector become driver of the economic growth. “With massive financial buffers, Kuwait is well positioned to withstand prolonged period of low oil prices. However, the focus should remain on structural reforms and improvement in the business environment,” said Iradian.