The alarm bells are ringing in the Gulf – and not just in Dubai. In Kuwait, the financial services sector is in strife. A default by its biggest investment company and a government-backed rescue of its second-biggest lender constitute serious damage in themselves but some analysts fear that up to another 30 listed firms could go bust because of the credit crunch.
Kuwait’s problems are not unique: as in many other Gulf countries the stock market is struggling, down 50% since October, and liquidity is tight. Financing conditions, however, are tougher there than elsewhere in the region. Kuwait is the only Gulf Cooperation Council country to adopt a basket peg exchange rate regime as opposed to a dollar peg. As such, currency risks associated with the dinar "are acting as a barrier against a flow of funds from cheap sources in the GCC to Kuwaiti banks," say analysts at Gulf Finance House. Consequently, dinar interbank rates are the highest in the region, they add.
This state of affairs, together with the difficulties of raising capital internationally, has hit Kuwait’s investment companies hard. These firms had relied on short-term borrowing both locally and internationally to build their businesses. The central bank puts the total debt of these companies, which number 98, at $18.6 billion, of which $8.2 billion is foreign debt.
Last month it all proved too much for Kuwait’s biggest investment firm, Global Investment House (GIH), which defaulted on most of its $3 billion of debt, although it continues to service its coupon payments. It became the first big financial institution in the Gulf to default since the credit crunch began.
Its rival, Investment Dar, which bought luxury car maker Aston Martin last year, is also facing liquidity problems. It says that it needs up to $1 billion to refinance debt and has appointed Credit Suisse to advise on its strategy. GIH and Investment Dar, two of the country’s former leading lights, will probably get through their funding crises. However, other, smaller, investment companies are more likely to fall by the wayside.
It is not just the investment companies that are at risk. Kuwait’s banks have an exposure of about $10 billion to them. The governments immediate response has been to guarantee 50% of $13.8 billion of new credit facilities to be granted by banks to local companies. Further measures may be forthcoming as part of a broader stimulus package.
The last thing the government needs is another bank in trouble following the crisis at Gulf Bank last year. The bank suffered a run after it revealed losses of KD375 million ($1.3 billion) in derivatives trades, caused by the fall of the euro against the dollar. It was thrown a lifeline after its shareholders subscribed to a rights issue in December. In addition, Kuwait Investment Authority has taken a 16% stake.
Kuwait’s reputation as one of the more sophisticated financial centres in the Gulf is at stake. Unlike in most of the other Gulf markets, the authorities have encouraged an institutional investment culture to develop – firms such as GIH are testament to that. Regulations, however, are still lax, with listed companies required to disclose minimal information. GIH’s mounting debt levels, for example, caught many analysts by surprise. Defaults by such companies, let alone bank failures, do not constitute the kind of message Kuwait should be sending to the world. Enough damage has been done already.
