Higher oil prices boost govt spending: Fitch Solution

KUWAIT CITY, Sept 19: Fitch Solutions has raised its forecast for bank credit growth in Kuwait during 2022 from 7.6 percent to 9.7 percent, due to the increase in the optimistic outlook for the country’s economic growth trajectory, noting that Kuwait is on the verge of recording the fastest credit growth since 2008, reports Al-Rai daily.

The agency added the demand for loans in the first half of this year was strong following what it called the reopening of the economy and the rise in oil prices at the world level, which strengthened both the government spending and business activity, noting that for the third quarter of 2022 data, the demand for loans likely remained strong as indicated by the strong July reading, which showed private sector loan growth of 9.4 percent y/y. The sources stated that the strong result can be explained primarily by the rapid expansion of government services, where higher oil prices boost government spending, and in the oil and gas sector, due to the return of business momentum aimed at expanding oil production.

As for the next stage, Fitch believes that credit growth will remain strong until the fourth quarter of 2022, but the tightening of monetary policy and the return of consumption patterns to normal will begin to affect loan demand, expecting economic growth to slow in the coming quarters as household demand declines, and it is likely that this reduces the demand for credit from the non-oil economy, as growth expectations decline, underlying supportive effects begin to fade, and the Central Bank of Kuwait continues to raise the discount rate, which will increase borrowing costs and discourage spending.

At the same time, the agency expected that the demand for loans by the oil and gas sector would slow, pointing out that after the decision of “OPEC Plus” to ease supply cuts in 2021, Kuwait boosted activity in its oil fields at a very rapid pace to return production to the market and resume expansion work, while “Fitch Solutions” ruled out that this level of activity will continue in the coming quarters. In general, it expects credit growth to decline to 4.7 percent in 2023, in line with its view that real GDP growth will also decline from 8 percent to 4.6 percent.

Bond portfolio
The agency expected that the bank’s bond portfolio would continue to shrink, limiting growth in total assets, as the government’s inability to issue debt since the fourth quarter of 2017 due to government- parliamentary disputes, along with financial surpluses, led to a steady decline in banks’ holdings of bonds in the immediate future, noting that this was reinforced by the last reading for the month of July, which showed that the bank bond portfolio as a share of total assets came at 4.5 percent, which is the lowest value recorded.

Fitch Solutions believes that high oil prices and a challenging political environment will delay the passage of the Public Debt Law until late 2023, while it has generally forecast total asset growth in 2022 to be above-trend at 6.9 percent (refl ecting the ultra-rapid credit growth), saying growth will be at 5.1 percent.