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Despite boasting the largest fiscal surplus (~23% of GDP) of Gulf-based oil exporters (with a population of 2.8m it holds 7.6% of the world’s total proven reserves and currently does roughly 2.8m b/d in production which is fifth among OPEC members), Kuwait’s ongoing political rancor leaves it ever-dependent on energy (40% of GDP versus 27% for Saudi Arabia), delays reform and pointedly “sours the investment case” per Silk Invest CIO Daniel Broby, though given its surplus, socio-economic largesse (this spring the Ministry of Finance announced a one-time monetary payment, food and utility subsidies and salaries increases together worth roughly 6% of GDP, for instance) should be able to allay at least some tensions for quite some time. Yet it could also serve to perpetually hinder the defacto rivalry raging between the ruling family and “a fluid assembly dominated by loose blocs of Islamist and tribal deputies” that in effect leaves Kuwait “a lot less dynamic than ambitious Gulf neighbours such as Qatar, Dubai and Abu Dhabi, and less attractive to foreign investors.” Kuwait’s flagship index dropped 0.7 percent in 2010 and has dithered in 2011 as well–down 6.5% YTD, topped only by Egypt’s 30% plunge, and with space to flounder perhaps given it still boasts MENA’s second-highest trailing PE ratio. All this despite the fact that its state-run oil company is set to up production to 4m b/d within the next decade, assuming its impending deal with Exxon to help develop complicated fields near the northern border comes to fruition. On that latter note, however, the FT notes that hitherto “parliament has vociferously opposed any agreement with foreign companies.”
In its weekly update to investors, London-based asset and fund manager Silk Invest noted that Kuwaiti-based Burgan Bank “had successfully completed its capital increase,” a 272.6 million Euros rights issue that will theoretically help “further strengthen its business locally as well as capitalize on its expansion strategy which has primarily targeted high growth markets in the Middle East and North Africa (MENA) region.” The bank currently has majority stakes, for instance, in the Bank of Baghdad, Gulf Bank Algeria and Jordan Kuwait Bank. The capital increase, it should be noted, is wholly separate from this week’s report that the bank has a healthy 15.9% capital adequacy ratio (i.e., tier one plus tier two over risk weighted assets) on a consolidated basis.
Moreover, per a S&P report from this past week, Burgan Bank is one of four domestic-based firms that are considered “highly systemically important” in a sector towards which Kuwaiti authorities tend to be more ‘interventionist’ than not. Despite its worries about the bank’s deterioarting asset quality, S&P thus affirmed Burgan Bank’s ‘BBB+/A-2’ long- and short-term counterparty credit ratings. A few days later the bank announced its operating income of KD43.2m had grown by 37% while operating profit surged to KD29.3m with a growth of 39%.
Kuwait-based Abyaar Real Estate Development Company (Abyaar), which develops and manages properties in the UAE and in Dubai in particular, recently announced a net profit for the first nine months of 2009 of KD5 million ($17.5 million) and an EPS of 6.90 fils (a subdivision of currency used in many Arab countries, where KD1 roughly equals 1000 fils). Per its chairman, Hesham Abdul Wahab Al Obeid, the firm reduced financing debt during the period by 30%, down to KD 77 million, compared to KD108 million during the same period of 2008. Owners’ equity also increased, up to KD146 million.
The strong showing begs the question how quickly Abyaar will return to the debt markets; in October 2008 it postponed a proposed sale of Islamic bonds worth up to $1 billion in order to finance its expansion plans. Rashed Al-Rashdan, its managing director, said in the summer of 2008 for instance that the developer was looking to expand “aggressively” into other “high growth” markets in the region, including Saudi Arabia and Qatar. At least the market seems convinced of its future operating and financing revenue stream–earlier in the year the company successfully increased its capital base from KD 53 million in 2008 to KD 106 million in 2009 through a new share subscription.
Investment firm Kuwait Projects Co.’s (KIPCO) seven-year, $500 million benchmark bond–which featured a fixed 8.875% rate and were priced at a spread of 608 bps above the USD mid-swap curve, fetched orders in excess of $3.3 billion this past week, signaling further maturation of the Gulf’s debt markets. The bond was not only the first to come out of Kuwait this year, but it was also the first international bond of the year to be issued by a Gulf-based private sector firm. KIPCO owns stakes in 50 companies and operates in 21 countries, and this past spring announced that it would “move ahead with plans to sell pension products worth up to $500 million in the Middle East over the next five years, and launch an insurance firm in Algeria [later in the year].”
Earlier this year the IMF stated that debt securities form just 3% of the Middle East and North African (MENA) capital markets–compared with an average of 42% across the rest of global capital markets. However, the credit crisis has ironically spurred the market’s growth, as domestic banks became more risk averse and reticent to enter into the discounted syndicated loans that were viewed as a cheaper alternative to paper, and which had hitherto greased the region’s economic wheels. Borrowers also took to the fact that debt issuances could be targeted to a wider market of buyers–such as pensions and insurance companies–than could syndicated loans, given not only their relative liquidity, but also the fact that they could be denominated in various currencies. Per Dr. Nasser Saidi, Chief Economist of the Dubai International Financial Centre (DIFC), debt markets in fact are the holy grail of the region’s long-term social and economic development:
“Money has been coming in from oil but now we have matured and are looking at economic integration. We have to make that transformation and for that we have to break the link between oil and investments. The price of oil can lead to a cycle of boom and bust and that can be broken by the debt markets.”
The worry, however, centers around the viability of sustained demand. If the “new normal” is indeed accurate, then emerging and frontier debt–both sovereign and corporate–will truly need to replace or at least coincide with more mature, developed issuance.
Reports surfaced this past week that Kuwait’s Mobile Telecommunications Co. (Zain)–the leading African and Middle Eastern mobile operator–is close to rescheduling a $2.5 billion two-year “murabaha” loan agreement on behalf of its subsidiary, Zain Saudi Arabia, that it signed in 2007 in order to finance the development of its infrastructure and the expansion of its subscribers’ base. Commitments will likely come from Saudi Arabia’s Al-Rajhi Bank and Banque Saudi Fransi, as well as France’s Calyon.
Under murabaha, a intermediary financier buys a property or commodity and sells it to the buyer at a higher price (retaining free and clear title/ownership until the loan is paid in full), thus complying with Islam’s ban on interest. The theory under murabaha is that the transaction is not an interest-bearing loan, which is considered “riba” (excess). To prevent riba, the intermediary cannot be compensated above the agreed upon terms of the contract–even through late penalties should one party default. Murabaha is therefore a permitted method form credit extension under Sharia (Islamic religious) law, since the fee earned is not interest per se, but rather a holding-related charge.
Back in May Zain lowered its net profit growth targets for 2009 from 30% to 20% due to the global recession, and also announced that it would seek a credit rating in order to tap longer term debt markets by 2010-end. It also unveiled a plan to slash its expenditure targets by half, and to focus on “synergies among its various units,” per Ibrahim Adel, its Chief Communications Officer.
The Economist notes this week that Kuwait’s foray into Cambodian farmland (its purported compensation for $546m to finance a dam on the Stueng Sen river for irrigation and hydropower and to build a road to the Thai border) can surely be a win-win, even if historically such deals haven’t always worked out and local rice farmers are cautious, worried they will be left in the cold.
The government insists the deal would be good for the country and for economic growth. Cheam Yeap, the chairman of the parliamentary economics and finance committee, says that “somehow we have to attract investors for national development.” He argues that land conflict is the fault of farmers as well as the government and that farmers have to be realistic.
This is not merely self-serving. Cambodia’s rice yields are about half those in neighbouring Thailand and Vietnam. Many people—not just the Kuwaitis—are seeking to modernise farming, which is the largest employer in Cambodia.
International donors are hoping to improve the lot of small-scale farmers by helping them take advantage of world markets by investing in productivity, food processing and transport infrastructure. Other international businessmen, including some from Israel, are seeking to bring foreign technology and capital into Cambodia’s fledgling agri-business sector.
So the question is not whether investment by Kuwait or anyone else is in Cambodia’s long-term interest. It is whether the terms of the particular deal are beneficial. Alas, it is far from clear in this case whether Cambodia’s rulers have been influenced by economic development—or by the prospect of another quick payday.
Faraj Al-Khudhari, Chairman of the Kuawait-based Al-Mutakhasses real-estate company, announced yesterday that although the year began with bearish indicators, where the value of the property transactions amounted only to 79 million Kuwaiti dinars in January, it has since grown, reaching KD 114 million in February. The value of real-estates deals grew further, posting KD 151 million in March, which may signal that the sector could witness a record leap in the months ahead. The number of the deals has increased from 294 in January, to 358 in March and 434 in April. Al-Khudhari linked this upward trend to an increase in loans by banks and also a desire among investors to take advantage of the period of the low prices before the projected upsurge of prices.
Palestinian Prime Minister Salam Fayyad noted this past weekend that a deal for Kuwait’s Mobile Telecommunications Co. (Zain) to take a major stake in Palestinian operator Palestine Telecommunication Company (PalTel)–which operates in the occupied West Bank and Gaza Strip–could be signed sometime this week. Zain, which is Kuwait’s biggest mobile operator, is spending billions to expand and provides services in 22 countries in the Middle East and Africa. Shares of PalTel, meanwhile, rose 4.9% on Monday on heavy volume and are up 26.3% YTD. Palestine’s Al-Quds Index, meanwhile, is up 23% in 2009, one of only two Middle East and North African exchanges up for the year.
A Paltel acquisition would become Zain’s 23rd country, following a three-year campaign costing around $5 billion. Zain plans to spend another $5 billion on acquisitions in the next few years, said its CEO, Dr. Saad Al-Barrak, who also mentioned that the company is interested in operations in Mali, Rwanda, Burundi, Angola and Liberia.
The Kuwaiti-based Zain Group, which operates in 22 countries in Africa and the Middle East, reported that its revenues rose 26% to $7.4 billion (Sh584 billion) in the year ended 2008 on increased customer numbers. Moreover, according to CEO Saad Al-Barrack, the company’s stout finances allow it to actively pursue further acquisitions, given that “valuations of many prime telecom assets are considerably lower than they were just six months ago.”
Fitch Ratings opined this week that Kuwaiti banks’ indirect exposure to the stock market, in the form of loans to troubled investment companies and lending for the purchase of shares, is “significant” and may lead to future asset quality problems, rising impairment charges and declining profitability. Moreover, a slowdown in the real estate and construction sectors in Kuwait also has the potential to undermine asset quality, Fitch said. The warning comes on the heels of Fitch’s decision last month to downgrade the Long-term Issuer Default Rating (IDR) of Global Investment House, the largest investment company in Kuwait, to D, following an announcement by the firm that it had defaulted on the majority of its financial obligations.
Kuwait Finance House, Commercial Bank of Kuwait and National Bank of Kuwait reported a decline in net income of 46.3pc, 16.3pc and 6.7pc respectively in the fourth quarter of last year.
JGW
Frontier Markets 