Kuwait: Balancing act

Capital markets in Kuwait, like those in many GCC countries, are currently experiencing a challenging period, with investors largely staying on the sidelines in light of global economic uncertainties. Nonetheless, positive signs have recently emerged from the country, including the potential for two bond issuances in the near future, as well as the successful completion of a six-month transitional phase for the Capital Markets Authority (CMA), the country’s first independent stock market regulator.

On December 15, Commercial Facilities Company SAK (CFC), Kuwait’s largest non-bank consumer finance firm, announced the successful completion of a KD50m ($180m) bond, the largest of its previous issuances. The four-year amortising note has a coupon that is priced at the Central Bank of Kuwait (CBK) discount rate plus 140 basis points. Proceeds from the bond, which has been rated BBB by ratings agency Capital Intelligence, will be used for general corporate purposes.

NBK Capital is the lead manager for the issuance. “This issuance is an important one as it comes at a vital time for financial institutions that are flushed with liquidity, giving them a solid, profitable and prudent investment opportunity in one of Kuwait’s blue-chip companies,” Salah Al Fulaij, the CEO of NBK Capital, told local press.

The CFC bond is the first dinar-denominated note to be offered in 2011. The last local currency bond was issued in June 2010, when United Real Estate Company, a Kuwait-based real estate developer, floated a KD40m ($144.2m) bond. The only other fixed-income offering in Kuwait during 2010 was a $500m, 10-year issuance by Kuwait Projects Company (KIPCO), the country’s largest investment company (IC), under its $2bn Euro Medium Term Note programme.

Another KIPCO bond issuance may hit the market in the coming months. In October, Pinak Maitra, KIPCO’s CFO, said the company was still awaiting approval from the CMA to float a KD80m ($288.4m) note with a maturity term of three to seven years. In July, ratings agency Capital Standards gave a provisional rating of BBB+ to the proposed issuance, which will be led by NBK Capital and KIPCO Asset Management.

Meanwhile, on December 1 the Kuwait Stock Exchange (KSE) had its best single-day performance since October 16, rising by 0.4% and reducing overall bourse losses in 2011 to 16.1%. However, investors remain wary of entering the market, according to a recent report by Reuters, which cited slow implementation of the government’s four-year development plan, the recent resignation of the government and uncertainty regarding the future role of the CMA as factors that might be weighing on the KSE’s performance.

In theory, the CMA could boost the market by increasing transparency and therefore attract more investors, a point that Hisham A Al Razzuqi, the CEO of Gulf Investment Corporation, recently made to OBG. However, he cautioned that the organisation must strike the right balance between regulation and free market activity.

“Enhancement of the regulatory framework is always positive,” he said. “However, regulatory bodies must strive to be enablers and should work closely with other market participants. Going forward, the CMA must develop sound regulations that protect investors, yet keep rules flexible enough to accommodate entrepreneurship and promote market activity. If this balancing act is achieved, Kuwait may witness a substantial increase in both local and foreign investment,” he said.

These are still early days for the CMA, which began operations in March. In September the regulator announced that it had successfully completed its first six-month transitional phase and had signed a memorandum of understanding (MoU) with the CBK regarding their respective supervisory duties.

According to a joint statement by the authority and the central bank, the MoU, which had been in the pipeline for some time, delineates regulatory responsibility in a variety of areas, including corporate acquisitions, the marketing of non-Kuwaiti notes and auditing.

As part of its September announcement, the CMA also noted that all ICs, of which there are almost 100 in Kuwait, had been asked to review their activities and decide whether to operate in financing or to offer investment and asset management services.

ICs, which are involved in a variety of activities, including direct and indirect investment in various sectors, asset management and financial advisory services, came under increasing pressure during the 2008-09 financial crisis as the result of over-leveraging and maturity mismatches, among other factors. The IMF has for some time called for increased regulation of these entities.

Improved transparency could go some way towards attracting investors back to Kuwait’s stock market. In addition, the imminent issuance of a corporate bond, plus the potential for a second, could signal a revitalisation of capital markets in Kuwait after two years of limited activity. If the government were to hasten the process of carrying out the projects identified in the four-year development plan, this would likely further boost both economic activity and the stock market.

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