Central Bank eyes euro crisis with concern

Kuwait's Central Bank is greatly concerned by Europe's debt crisis and its possible impact on the stability of banks there, but it believes Kuwaiti banks are in good enough shape to withstand big global shocks, its governor said. "The precarious situation with sovereign debt in some European economies, and most recently the possible impact on banking stability in Europe, are major concerns to us in Kuwait," Sheikh Salem Abdul-Aziz al-Sabah said in an emailed response to Reuters questions. Despite a decrease in crude oil prices in the past six months, Kuwait's economic growth is expected to accelerate to 4.7 percent this year, a Reuters poll showed in September, from 3.4 percent estimated by the International Monetary Fund for 2010. "We believe...that the Kuwaiti banking system is in quite a good shape to withstand extraordinary global shocks," Sheikh Salem said. "By any standard, Kuwaiti banks are presently well capitalised including conservative leveraging ratios. Equally important, our su pervisory reviews show our banks have more than ample liquidity. Fitch Ratings said in July that despite an improving operating environment, large exposures to construction, real estate and investment companies and speculative stock-market lending were a common feature across Kuwaiti banks, posing risks. In August, the IMF said any further deterioration in balance sheets of loss-making investment companies or delays in their debt restructuring could hit the profitability of banks, whose average capital adequacy ratio edged up to 19 percent in 2010. Private sector deposi ts in Kuwaiti banks grew to a record high of KD 26.5 billion ($96.2 billion) in September, the central bank's data show. The central bank has put in place several measures to better monitor local lenders, Sheikh Salem said. It also launched a new Financial Stability Office in August. Kuwait's top policymakers, including Sheikh Salem, called on the government this summer to correct imbalances in the oil-reliant economy and trim budget waste, though analysts have said political frictions between the Cabinet and parliament may slow that push. The world's No. 6 oil exporter needs mainly to tackle imbalances related to the general budget, the labour market and the role of the private sector, which reflect the government's dominance in the economy, Sheikh Salem said. Addressing them requires a redefinition of that role through a comprehensive reform program. The challenges are structural and require persistence," he said. "Therefore it is essential and urgent that significant reform steps are taken at this stage, because further postponement and delay will reduce the options available and further increase their cost." Fiscal reform should gradually reduce current expenditures and enhance non-oil revenues, Sheikh Salem said. Kuwait, with 3.6 million people, depends on income from crude oil for around 93 percent of its government budget, the most among oil-exporting Gulf countries. Despite its wealth, the state-dominated economy has drawn few foreign investors, unlike nearby Qatar and the United Arab Emirates. Since 2004, Kuwait's projected budget spending has tripled to a record 19.4 billion dinars planned for the 2011/12 fiscal year, which started in April, with expenditure on wages for government employees rising almost as f ast. Parliament cleared a $110 billion, four-year development plan in Feb 2010 to diversify away from oil and boost the private sector, which accounts for a quarter of the economy. But the plan is still mostly on paper as political conflicts have hindered concrete action. Sheikh Salem also said monetary policy was comfortable: "We believe that the current interest rate settings are appropriate and accommodative with the prevailing economic and financial conditions both domestically and internationally." He adde d, "Needless to say that we continue our monitoring of developments and stand ready to take necessary actions, if needed, to support our domestic economy. The central bank last cut its key discount rate by 50 basis points to 2.50 percent in February 2010 . Kuwait pegs its dinar to a currency basket, believed to be heavily dollar-weighted, after dropping a direct peg to the greenback in 2007.