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Volume 29 – Issue 43 – 27th October 2019

Prepared by Economic Research Unit I ALSHALL Consulting Co. I Tel: + 965 22451535 I Fax: +965 22422619

The GeneralReserve and TheBorrowing Principle

Oil Market The Iraqi Economy The Weekly Performance of Boursa Kuwait

National Bank of Kuwait Financial Results – 30 September 2019

ALSHALL Weekly Economic Report

1The General Reserve and The Borrowing Principle

1

The latest official figures available regarding the size of the general reserve for the country is about 16 months old or till the end of June 2018. Those figures may not be accu-rate after the State's final account for the fiscal year 2018/2019 achieved a substantial deficit by KD 3.346 billion after deducting the 10% from total revenues for the Future Generations Reserve. The increase in actual expenditures over the estimate in the budget was a prece-dent that has not occurred in Kuwait for 24 fiscal years. This is an indication to the extent of the uncontrolled fiscal policy. Actual expenditures for the fiscal year 20182019 exceeded the actual expenditures for the fiscal year 2017/2018 by KD 2.601 billion, or 13.5%. This deficit has supposedly been withdrawn from the liquid balance of the general reserve. We also believe that the government has repaid due loans from outside the public budget and it is likely it has doubled withdrawals from the general reserve.

While the non-liquid assets scored about half of that reserve or about KD 13 billion in the end of June 2018. It is assumed that the withdrawal was from the other liquid half, which is supposed to have been corroded by half as well.This means that what the government or the international financial institutions' forecasts say about the depletion of liquid assets of that reserve, either by the end of March 2020 or March 2021 is a real probability.

What we disagree with and believe it is an extremely dangerous approach is the use of the probability of the general reserve liquid assets' depletion as an excuse for the government to be allowed to pass a law that gives it the right to borrow to finance the public finance deficit. Allow-ing the government to borrow is prohibited until it presents a program with three legally binding targets. First, it should present a project in figures to reduce waste in public expenditures within a declared time frame; let the reduction in the current and upcoming budgets expendi-tures by known percentages be the start. The second goal is a declared and harsh position against corruption. It is irrational for the government to ignore bribed deputies

whose trading news in millions of dinars has filled the media, and then it promotes the principle of rationalization of expenses and imposing fees and taxes. The third goal is for the government to present its project for spending the borrowed money. Unless their return is higher than the cost of their borrowing and unless they are projects that create indigenous jobs opportunities, their borrowing authorizing is meaningless.

What the government should realize is that sustainability of public finance in accordance with its current policy and with the current and future oil market conditions is impos-sible.Overcoming short-term pressures by resorting to borrowing has unbearable consequences on the country. We believe that its option is to balance between the cost of its survival and the country's stability risks. Success if it wants it is to promote the country to the Norwegian model while failure means to drop to the Venezuelan model. The financial policy so far is moving towards the latter.

2Oil Market

2

On August 20th 2019, the U.S. "Energy Information Administration" (EIA) released its projections for the oil market. The purpose of their re-publishing is to link them with the need for fiscal reforms in Kuwait after the fiscal policy returned to being uncontrolled with the temporary rise in oil prices in 2018.

The "EIA" estimated "OPEC's" oil revenues in 2018 by US$ 711 billion, up by 32% from its US$ 538 billion in 2017. It dropped its estimated revenues in 2019 to about US$ 604 billion, a 15% loss from 2018 revenue level. The EIA estimates the per capita loss at "OPEC" from oil reve-nues by about 17% by its decline from about US$ 1,416 in 2018 to about US$ 1,180 in 2019. It estimates "OPEC's" loss in 2019 at 1.8 million barrels per day, bringing its share of global production to about 30.1 million bpd down from 31.9 million bpd in 2018. Production loss was due to its and its outside partners' attempts to support the price levels.

This means that oil revenues are declining. Despite "OPEC's" production reduction, that did not prevent prices from falling as well. This happens despite the sharp drop in major producers' exports such as Iran and Libya. Coun-tries that rely almost entirely on oil in financing their budg-ets, such as Kuwait which oil accounts for about 90% in financing its budget, have no choice but to control their expenses. Most importantly, most future oil scenarios are not promising, i.e. 2018 was the exception, while the rule is the continued pressures on oil revenues and downward production whether to lower production cuts to stabilize prices or because of any political breakthrough in Iran or Libya, or even for environmental reasons or technological developments in the production of clean fuel.

If public finances of most oil countries are currently facing deficit and the almost impossible control of supply varia-bles in the oil market, and pessimistic expectations of the future performance of the global economy which will nega-tively affect the demand side, the only option is to control the only variable you have the ability to affect, i.e. the public expenditures side, both qualitatively and quantita-tively, which is not currently happening in Kuwait.

3The Iraqi Economy

3

Most Middle East countries suffer from prospects of their failure economically with variations from one country to another. Most of that variation is due to the integrity and capability of their public administrations. Iraq is a clear case of the relative abundance of resources but with substantial inability in allocating them towards the real needs of the economy and citizens, in addition to the great waste due to administration corruption. In the last five years, Iraq has achieved oil revenues only by about US$ 370 billion and more than US$ 400 billion in total reve-nues. The last five years were years scarce in oil revenues. "The Economist" Intelligence Unit estimates Iraq's oil revenues in 2019 and 2020 by about US$ 185 billion, or more than US$ 200 billion for their total in two years. Nev-ertheless, its administrations failed to satisfy the very basic necessities of citizens, such as food, water, electricity, housing, infrastructure, hygiene, and employment, the source of obtaining all the foregoing.

In the latest report of "The Economist Intelligence Unit" -Country Report- on the 7th of October, the Unit estimates stable indicators for the performance of the Iraqi mac-ro-economy. The real growth expected in 2019 is around 3.5% and is 2.8% in 2020, although most of it is achieved due to the rise in oil production capacity. Inflation rates are at 1.1% and 1.5% for the two years, and the deficit of the general budget is -1.3% and -3% of its GDP for the two years. The current account achieves a surplus of 9.1% and 6.6% of GDP volume for the two years, and the exchange rate of the Iraqi Dinar is fixed. Even the total external debt estimated at US$ 78.3 billion does not exceed 34% of the nominal GDP value of 2019. Neverthe-less, Iraq passed by unfortunate violence in which human casualties fell, in an undue price. And the cause of violence is simply that the beneficiary of those macro indi-cators is not the public.

The situation of most oil countries fluctuates between the Norwegian model and the Venezuelan model. Norway is one of the best models in the world while Venezuela, the largest oil reserve in the world, is on the verge of becom-ing a failing state. What made the difference between the two countries is not resources but the ability and integrity of the administration. It is not in the interest of any of the neighboring countries to create a state of instability at its neighbors for a moral humanitarian reason first and because there is always the possibility of its crossing the border. Likewise, stability and success of a neighboring country is also a positive border crossing. The hope is that Iraq will stabilize and prosper.

4

4National Bank of Kuwait Financial Results – 30 September 2019

NBK announced the results of its operations for the first nine months of 2019, which indicated that the bank’s net profits (after tax deductions) scored KD 320 million, an increase by KD 30.4 million or by 10.5%, versus KD 289.6 million in the same period of 2018. This was achieved due to the decrease in total provisions by KD 40.8 million or by 28%, despite the rise in net operating income by a lower than the rise in total operating expens-es. Therefore, the bank’s operating profit decreased by KD 8.7 million or by 1.9%, reaching KD 451 million versus KD 459.7 million in the same period of 2018. The bank achieved net profit attributed to its shareholders in the amount of KD 302.2 million compared with KD 272.4 million, indicating an increase by KD 29.8 million or by 10.9% compared to the same period of 2018. Net operating income increased by KD 11 million or by 1.7% and scored KD 672.8 million versus KD 661.8 million in the same period last year. This resulted from rise in net interest income and net income from Islamic financ-ing to a total of KD 517 million versus KD 515 million, i.e. a rise by KD 2 million or by 0.4%. In details, the bank's net interest income (Islamic financing income excluded) rose by KD 83.1 million and interests expense (Murabaha Finance cost excluded) also rose by KD 79.2 million and thus, the net interest income rose by KD 3.9 million. The bank achieved net income from Islamic Financing by KD 91.1 million versus KD 93.1 million in the same period last year. Also, item of net fees and commissions rose by KD 2.4 million and reached KD 116.8 versus KD 114.4 million. Also, item of net investment income increased by KD 5.5 million scoring KD 6.9 million compared with KD 1.4 million.

On the other hand, total operating expenses increased by a higher value than the increase in the net operating income by KD 19.7 million or by 9.8%, scoring KD 221.8 million compared with KD 202.1 million at the end of September 2018. This was achieved due to the rise in all item of the operating expenses. According to AlShall estimates, assuming the exclusion of the impact of consolidating Bou-byan Bank’s results on the operating expenses, it increased from KD 160.6 million to KD 177.6 million, i.e. an increase by 10.6%. Total provisions was at KD 104.6

million, decreasing by KD 40.8 million or by 28% as men-tioned previously, from KD 145.4 million. Financial figures of the bank indicate total assets increased by KD 1.481 billion or by 5.4%, reaching KD 28.909 billion com-pared with KD 27.428 million at the end of 2018. Also, total assets rose by KD 1.784 million or by 6.6% if com-pared with the total in the end of September 2018. If we exclude the impact of consolidating Boubyan Bank, the growth rate would become 4.4%. Portfolio of loans, advances including Islamic financing for customers, the largest component of the bank’s assets, increased by 5.5% or by KD 855.9 million, raising the total portfolio value to KD 16.359 billion (56.6% of total assets) versus KD 15.503 billion (56.5% of total assets) by the end of 2018. It increased by KD 952.2 million or by 6.2%, if compared with the same period of 2018 when the portfolio totaled to KD 15.407 million (56.8% of total assets). If we exclude the impact of aggregating Boubyan Bank in its Islamic finance, growth rate would be 4.2%.

Figures indicate that the bank liabilities (excluding total equities) increased by KD 1.266 billion or by 5.3%, and scored KD 24.993 billion compared with the end of 2018. Total liabilities increased by KD 1.507 billion or by 6.4%, if compared with the total in the same period of last year. Excluding the impact of aggregating Boubyan Bank, growth rate will score nearly 4.6%. Percentage of total liabilities to total assets scored 86.5% versus 86.6% in the same period of last year.

Results of analyzing financial statements calculated on annual basis indicate that all bank's profitability indexes increased compared with the same period of 2018. The return on average assets (ROA) increased to 1.51% versus 1.45%. The return on average equities relevant to the bank shareholders (ROE) increased to 12.4% versus 11.8%. The return on average capital (ROC) increased to 67% versus 63.7%. Earnings per share (EPS) increased to 46 Fils com-pared with 41 Fils for the same period in 2018. (P/E) scored 15.4 times versus 15.2 times, as a result of the increase in the EPS by a lower percentage than the increase in the market stock price. (P/B) scored 1.6 times versus 1.4 times.

5

Total Operating Income as of 30 September 2019

Net Fee andCommission

1.0%

13.5%

4.6%

17.4% 63.3%

0.2%

Net InterestIncome

Net Fees and Commissions

Net Income fromIslamic Financing

Net Gains from Dealingin Foreign Currencies

Net InvestmentIncome

Other OperatingIncome

%

Change30/09/2019 30/09/2018Statement

(Thousand KD) Value(Thousand KD)

28,909,237

24,992,828

3,316,250

672,755

221,793

104,656

26,324

319,982

1.51%

12.4%

67.0%

46

947

15.4

1.6

Ratios

* Indicators Ended September 30, 2019 on an annual basis.** Calculated based on the average rate of the financial data at the end of December 2018 and 30 September 2019.

Total Assets

Total liabilities

Total Equity attributable to the equity

Total Operating Revenues

Total Operating Expenses

Provision

Taxation

Net income

** Return on Average Assets (ROA)

** Return on Average Equity Relevant to the

** Return on Average Capital (ROC)

* Earnings per share (EPS) – (Fils)

Closing price – (Fils)

* Price to Earnings Per Share Multiplies (P/E)

Price to Book Value Multiplies (P/B)

27,125,716

23,486,312

3,105,858

661,798

202,084

145,422

24,680

289,612

1.45%

11.8%

63.7%

41

833

15.2

1.4

1,783,521

1,506,516

210,392

10,957

19,709

-40,766

1,644

30,370

5

114

6.6%

6.4%

6.8%

1.7%

9.8%

-28.0%

6.7%

10.5%

12.2%

13.7%

holders of the bank

Bank Shareholder (ROE)

6

5The Weekly Performance of Boursa Kuwait

The performance of Boursa Kuwait for last week was mixed, where the traded value, traded volume, number of transactions showed an increase, while the general index (AlShall index) showed a decrease. AlShall Index (value weighted) closed at 500.9 points as of last Thursday, show-

ing a decrease by 0.6 points or by 0.1% compared with its level last week. While it remained higher by 71.9 points or by 16.8% compared with the end of 2018.

The following tables summarize last week’s performance of Boursa Kuwait

Working days 5 5

AlShall index (33 Companies) 500.9 501.5 -0.1%

Boursa All Share Market Index 5,767.9 5,766.7 0.02%

Value Trade (KD) 118,357,384 99,135,360

Daily average (KD) 23,671,477 19,827,072 19.4%

Volume Trade (Shares) 836,064,375 526,069,539

Daily average (Shares) 167,212,875 105,213,908 58.9%

Transactions 30,543 22,552

Daily average (Transactions) 6,109 4,510 35.4%

DescriptionWeek 43

24/10/2019Week 42

17/10/2019Diff%

7

Most Active Sectors & Companies

ALSHALL INDEX Week 4324/10/2019

Week 4217/10/2019

Description

Sectors

Value Traded

KD

% of Total

Market

Kuwait Finance House

Burgan Bank

National Bank of Kuwait

Aayan Leasing & Investment Co.

Ahli United Bank (B.S.C)

Total

Description

Sectors

Banks Sector

Financial Services Sector

Industrials Sector

Real Estate Sector

Telecommunications Sector

14,752,230

11,844,849

9,175,993

8,868,866

6,491,149

51,133,087

Value Traded

KD

54,282,782

30,672,512

12,942,405

10,533,225

6,258,266

12.5%

10.0%

7.8%

7.5%

5.5%

43.2%

% of Total

Market

45.9%

25.9%

10.9%

8.9%

5.3%

Increased Value (# of Companies)

Decreased Value (# of Companies)

Unchanged Value (# of Companies)

Total Companies

17

13

3

33

17

14

2

33

8

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

National Bank Of Kuwait

Gulf Bank

Commercial Bank Of Kuwait

Al-Ahli Bank Of Kuwait

Kuwait International Bank

Ahli United Bank

Burgan Bank

Kuwait Finance Bank

Banking Sector

Commercial Facilities Company

International Financial Advisors

National Investments Company

Kuwait Projects Company (Holding)

Coast Investment & Development Company

Investment Sector

Kuwait Insurance Company

Gulf Insurance Company

Al-Ahleia Insurance Company

Warba Insurance Company

Company Name Thu Thu Diff Close

24/10/2019 17/10/2019 % 2018

Diff

%

621.6

225.9

521.2

191.8

294.8

330.2

336.9

2,104.4

594.7

146.5

163.3

159.8

581.8

47.8

218.8

68.4

354.1

159.2

51.2

627.7

229.2

516.0

195.1

293.7

335.5

330.3

2,117.5

598.7

145.8

165.4

157.3

576.5

43.1

216.4

70.6

354.1

157.7

53.2

(1.0)

(1.4)

1.0

(1.7)

0.4

(1.6)

2.0

(0.6)

(0.7)

0.5

(1.3)

1.6

0.9

10.9

1.1

(3.1)

0.0

1.0

(3.8)

520.4

204.8

516.0

193.1

275.1

296.5

284.8

1,659.8

502.7

126.3

227.8

103.8

486.7

45.4

187.1

79.4

373.5

160.3

54.1

19.4

10.3

1.0

(0.7)

7.2

11.4

18.3

26.8

18.3

16.0

(28.3)

53.9

19.5

5.3

16.9

(13.9)

(5.2)

(0.7)

(5.4)

9

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

Insurance Sector

Kuwait Real Estate Company

United Realty Company

National Real Estate Company

Salhiaha Real Estate Company

Real Estate Sector

The National Industries

Refrigeration Industries Co

Gulf Cable & Electrical Industries

Industrial Sector

Kuwait National Cinemas

The Public Warehousing Co

Mobile Telecommunications Co (ZAIN)

Safat Energy Co

Services Sector

Livestock Transport & Trading Co

Danah Alsafat Foodstuff Company

Food Sector

Sharjah Cement Co

Gulf Cement Co

Umm Al-Qaiwain Cement Industries

Non Kuwaiti Companies

General Index

Company Name Thu Thu Diff Close

24/10/2019 17/10/2019 % 2018

Diff

%

139.2

160.3

124.4

218.1

1,336.5

188.3

201.9

399.5

182.3

186.5

472.7

3,864.7

1,031.2

18.5

1,325.0

157.5

16.3

453.6

250.0

237.5

449.6

192.0

501.5

(0.7)

7.3

1.8

6.1

(0.3)

3.3

0.0

(5.7)

2.2

(1.3)

3.7

3.2

2.4

4.3

2.8

(5.8)

5.5

(0.5)

0.0

(8.3)

(2.1)

(2.0)

(0.1)

147.7

89.0

122.4

229.5

1,332.5

172.2

141.2

571.3

140.3

177.5

671.0

3,579.3

662.9

29.9

1,085.3

156.7

39.0

456.1

362.0

273.8

489.3

215.0

429.0

(6.4)

93.3

3.4

0.8

0.0

13.0

43.0

(34.0)

32.8

3.7

(26.9)

11.4

59.3

(35.5)

25.5

(5.4)

(55.9)

(1.0)

(30.9)

(20.5)

(10.1)

(12.5)

16.8

138.2

172.0

126.6

231.4

1,332.5

194.6

201.9

376.9

186.3

184.1

490.2

3,987.9

1,056.2

19.3

1,362.5

148.3

17.2

451.5

250.0

217.7

440.0

188.1

500.9

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