KUWAIT CITY, November 4: Domestic credit growth was a lackluster 0.4% in Q3, resulting in a 2.5% YTD increase. Headline growth in Q3 was negatively impacted by a plunge in lending to banks/financial institutions (-12% q/q) while underlying growth in terms of business and household lending was robust and stronger than in Q2. Business credit growth strengthened to 1.1% q/q, pushing the YTD increase to 3.4%. Looking ahead, the fourth quarter of the year is usually the weakest for business credit likely due to increased repayments and write-offs but the commencement of the interest rate-cutting cycle and a faster roll-out of project awards, as has been the case recently, are tailwinds for credit growth.

Within business lending, “construction” remains in the lead, in line with 2022-2023, up 4.2% q/q and 16% YTD while “trade” is a distant second (+7% YTD). In contrast, the oil/gas sector remains the main laggard, falling by 9% YTD, following a steep 8% drop in 2023. The dominant “real estate” was robust in Q3 and is up by 4.1% YTD, accelerating from only 1.3% growth in full-2023. After a very weak start for 2024 in terms of project awards, Q2 and Q3 were solid, with awards climbing to around KD 1.5 billion YTD through September. And while this is 13% lower y/y, we note that 2023 was a strong year in terms of awards, recording the highest level since 2017. This robust level of awards, if sustained, should eventually support business credit growth. On the other hand, the recovery in household credit continued with quarterly growth strengthening to the highest in seven quarters, and while y/y growth remains a limited 2.5%, annualized growth over the past three months is a stronger 4.3%. The higher interest rate environment has had a significant impact on household credit demand, with growth slowing to a near stand-still of 1.5% in 2023, which is way lower than historical growth rates. Therefore, interest rates’ downward trajectory going forward will be the key catalyst that should unlock growth for household credit.

Recovery in private-sector deposits gained stream while public-institution deposits remain very volatile

Resident deposits increased by a solid 2.5% q/q, driving up the YTD increase to 3.7%. Private-sector deposits (77% of total deposits) continued their recovery following a weak 2023, growing by 4.3% YTD. Government deposits continued to power ahead and are up strongly for the seventh straight quarter while public-institution deposits remain very volatile. Within private-sector KD deposits, time deposits continued to outstrip CASA, but the differential in terms of y/y growth rates (at +8.3% and -2.7%, respectively) is significantly narrower than the peak seen in mid-2023.

Market’s expectation of rate cuts in the US has become less aggressive, more in line with the Fed’s dot-plot

Following the Fed’s outsized 50 bps rate cut in September, the Central Bank of Kuwait, unsurprisingly, cut the discount rate by a smaller 25 bps. Given inflation and labor market developments in the US, the market’s expectation for US rate cuts has been dialed back to a cumulative 50 bps before end-2024 and an additional 75 bps in 2025, while the Fed’s dot-plot indicates cuts of 50 bps and 100 bps, respectively. Irrespective of the size and timing of future cuts, the downward trajectory in interest rates should support credit growth.