Kuwait’s economy stays resilient with central bank policies and strong government spending

• Local credit is forecasted to continue growing at healthy rates, although financial markets may experience a correction, given the rise in returns on risk-free assets, according to Central Bank of Kuwait report.

• Global central banks’ monetary tightening to combat inflation, combined with banking sector failures, led to the collapse of several banks in the U.S. and Europe.

• In 2023, banking sector deposits rose to KD 73.5 billion with a 4.4% growth rate, while total loans increased by KD 1.7 billion, or 2.6%, reaching KD 69.2 billion.

• The local banking sector maintained a positive trajectory, with assets growing 3.1% (KD 3.3 billion) to a total of KD 110.4 billion, down from 17.7% growth the previous year.

The Central Bank of Kuwait has released the 2023 Financial Stability Report, in line with its commitment to promoting transparency, disclosure, and providing accurate information and statistics on the banking and financial sectors, according to Al Anba newspaper.

Basel Al-Haroon, Governor of the Central Bank of Kuwait, stated that the report, which has been issued by the bank for the past twelve years, covers the most important developments related to Kuwait’s financial and banking system in 2023. This year saw the continuation of monetary tightening policies adopted by many global central banks to combat the unprecedented rise in inflation rates, alongside banking sector failures that led to the collapse of several banks in the United States and Europe. Additionally, the year was marked by growing geopolitical tensions both globally and regionally.

The report provides an analysis of global and local economic developments, as well as a detailed overview of the Kuwaiti financial system. It examines the developments in the Kuwaiti banking sector throughout the year, focusing on risks such as market, credit, liquidity, and operational risks, along with the profitability and financial solvency of the sector. The report also highlights advances in the infrastructure of payment and settlement systems.

Furthermore, the report includes several annexes addressing key challenges and important topics. It outlines the Central Bank of Kuwait’s efforts to mitigate liquidity risks in the banking sector and tackle digital financial fraud. It also briefly presents the central bank’s macro-hedging framework and its effective use of tools to strengthen financial and monetary stability.

Inflation rates declined from their peak levels

The Central Bank of Kuwait’s report revealed that the latter part of 2024 will see the beginning of a return to tighter monetary policies, as inflation rates have declined from their peak levels. As a result, global growth is expected to stabilize in line with long-term trends. However, geopolitical tensions will remain one of the most significant risks impacting global growth prospects.

The U.S. presidential election campaign, along with elections in several other major countries, will also contribute to deepening uncertainty in global markets. Given these factors, global financial markets face several potential challenges, and an increase in defaults is expected due to the rising cost of credit over the past two years.

At the national level, the economy is expected to remain resilient, supported by the Central Bank of Kuwait’s gradual and balanced approach to adjusting the discount rate on the monetary policy side, and strong government spending on the fiscal policy side. Recent internal political developments in the country are also expected to accelerate the pace of necessary economic and structural reforms.

Meanwhile, local credit is forecasted to continue growing at healthy rates, although financial markets may experience a correction, given the rise in returns on risk-free assets. Default rates may also increase locally due to rising interest rates, as these effects often take time to manifest. Nevertheless, the Kuwaiti banking system enjoys robust buffers and exceeds regulatory requirements across all financial safety indicators, underscoring the strength of its institutions and their ability to absorb changes at both the global and local levels.

Banking sector sees slowdown in both global and local economic activity in 2023

The year 2023 witnessed a slowdown in both global and local economic activity. However, the local banking sector maintained a positive trajectory, with assets recording a relatively modest growth rate of 3.1%, compared to 17.7% in the previous year. In absolute terms, KD 3.3 billion was added to the banking system’s assets, which currently total KD 110.4 billion.

When comparing developments in Islamic banks to conventional banks, Islamic banks continued to lead in asset growth during 2023. While conventional banks’ assets grew by 2.3% to reach KD 55.6 billion (up from KD 54.4 billion in 2022), Islamic banks grew by about 4%, reaching KD 54.8 billion (up from KD 52.7 billion in 2022). As a result, the share of Islamic banks’ assets as a percentage of the sector’s total assets approached that of their conventional counterparts.

Local banks focus on their core financing operations

In terms of business activity, local banks continued to focus on their core financing operations, as the loan portfolio experienced growth and remained the primary use of funds. High interest rates and some banks’ preference for investing in fixed-income instruments impacted the net loan share.

Despite the high interest rate environment in 2023, banks played their role as financial intermediaries by expanding their credit portfolios. Total loans grew by approximately KD 1.7 billion, reflecting a growth rate of 2.6%, reaching KD 69.2 billion by the end of 2023.

Regarding the sectoral distribution of the loan portfolio, most economic sectors experienced increases in 2023, particularly in productive sectors such as services, construction, and trade, which collectively saw an increase of about KD 870 million.

Although limited financing was directed to the household sector during 2023, this sector still dominates the loan portfolio. Banks typically prefer to lend to households due to the stability of borrowers’ incomes (most of whom are government employees), and lending to individuals helps reduce credit concentration in banks’ loan portfolios.

Distribution of the loan portfolio

Regarding the distribution of the portfolio by currency, it has remained stable over the past few years. Loans granted in local currency still constitute the largest proportion of the total loan portfolio, accounting for about 64.2%. In contrast, loans granted in foreign currency declined by approximately KD 1.1 billion, reducing their share to 7.7% of the total loans granted in foreign currency.

Meanwhile, loans granted in foreign currencies outside the State of Kuwait increased by about KD 1.8 billion, raising their share of total foreign currency loans from 87.5% in 2022 to 92.3% in 2023. This increase reflects the availability of financing opportunities in Gulf Cooperation Council (GCC) countries, as well as the banking presence of local banks in those regions.

Despite a slight increase in the share of loans directed to GCC countries within the total portfolio, loans to local customers still account for the largest share at 66.7%.

Banking sector deposits rise in 2023

Banking sector deposits continued to rise during 2023, reaching KD 73.5 billion and recording a growth rate of 4.4%. This growth was primarily driven by a 14% increase in local currency deposits compared to 2022, during which total banking sector deposits grew exceptionally by about 12.3%, largely due to a local bank acquiring a foreign bank during the year.

Profitability of local banks improve

The profitability of the local banking sector continued to improve during 2023, despite the recession that characterized the year. High interest rates and strong asset quality contributed to the sector’s enhanced profitability levels. As a result, the Kuwaiti banking sector achieved a net profit attributable to shareholders of KD 1.5 billion, marking a historical high and a growth of 26% compared to the previous year, when net profit attributable to shareholders was approximately KD 1.2 billion by the end of 2022.

High financial solvency

The banking sector enjoys high financial solvency, supported by robust capital adequacy levels. The sector’s capital adequacy ratio increased in 2023 to 19.9%, up from 19.2% in 2022.

Number of investment and finance firms decline

The number of investment companies (including two financing companies) continued to decline, dropping from about 40 companies at the beginning of 2022 to approximately 27 at the end of 2022, and further to 25 at the end of 2023 (16 conventional and 9 Islamic). This represents a 37.5% decrease in the number of companies. This decline may be attributed to the costs associated with complying with the regulations set forth by the Capital Markets Authority and the Central Bank of Kuwait, which pressured companies to relinquish unused financing licenses.

Exchange companies witnessed major developments

Local exchange companies experienced significant developments during 2023, with their assets growing by 5.2%, primarily driven by an increase in cash and cash equivalents. However, on the liabilities side, accounts payable also increased, which may indicate a correlation with the rise in cash and cash equivalents. Shareholders’ equity continued its upward trajectory, aligning with regulatory requirements and the growth of these companies.

Despite the growth in assets, the performance of exchange companies declined, as evidenced by a 41% decrease in net profits. This decline was attributed to reduced revenues from currency sales, coupled with increased expenses, particularly in administrative and banking costs. The drop in profits had a direct impact on the efficiency indicators of exchange companies, reflected in the return on average assets and return on average equity.

1.7 billion dinars jump in loan portfolio

The acceleration in credit exposure growth slowed in 2023, which includes loans, fixed-income investments, and interbank deposits, increasing by 3.4% compared to 17.3% in 2022. This growth was mainly concentrated in GCC countries, particularly the Kingdom of Saudi Arabia and the United Arab Emirates. The increase in these exposures was primarily due to growth in loans and fixed-income investments, while interbank deposits declined as these funds were reallocated to financing opportunities.

The loan portfolio is a key factor in the growth of credit exposures, increasing by about 2.6% in 2023, equivalent to approximately KD 1.7 billion, out of a total portfolio of KD 69.2 billion.

Kuwaiti dinar thrives under smart currency link

The Central Bank’s report stated that the Kuwaiti dinar benefited from an exchange rate system that links its value to a weighted basket of currencies from countries with which Kuwait has significant trade and financial relations. This approach largely neutralized the individual impact of each currency on the final outcome, ensuring relative stability of the exchange rate. This stability persisted despite the interest rate differential favoring the US dollar, reaffirming the effectiveness of the monetary policy in place.

Despite the aforementioned factors causing fluctuations, the exchange rate of the US dollar against the Kuwaiti dinar closed the year with a slight increase of about 0.1% in favor of the US dollar.