Business & Finance Club Magazine - Finance Sector - Kuwait: During the month of May, the CBK continued its policy of helping banks, who have excess liquidity, to find short-term investment opportunities that could contribute in compensating for the slowdown in credit growth. Accordingly, the CBK announced the issuance of two tranches of one-year Treasury Bonds, totaling KD 185 million and carrying a coupon of 1.25 per cent per annum. As well, two-year Treasury Bonds worth of KD 33 million was issued during the month carrying a coupon of 1.35 per cent per annum. Treasury Bonds issues by the CBK serve to wipe off excess cash in local banks and to create investment opportunities for risk-averse banks that are reluctant to extend credit or invest amid the global credit crunch.

Kuwait Inter-bank Offered Rates (KIBOR) across different maturities sustained the same level for the third consecutive month this year. The downward trend seen in 2009 and first 2 month of 2010 is mainly affected by the CBKís monetary tools to spur the local economy, solve for the liquidity squeeze problems, and enhance the tight credit market through discount and repo rate cuts as well as the issuance of T-bonds. The above chart shows the changes in KIBOR across different maturities.
In its meetings on the 9th and 10th of May, the Federal Open Market Committee has authorized re-establishment of its temporary U.S. dollar liquidity swap arrangement with the Bank of England, the European Central Bank, the Swiss National Bank and Bank of Japan that will provide the central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed rates for the full allotment.

In response to the re-emergence of strains in U.S. dollar short-term funding markets in Europe, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank have announced the reestablishment of temporary U.S. dollar liquidity swap facilities. These facilities are designed to help improve liquidity conditions in U.S. dollar funding markets and to prevent the spread of strains to other markets and financial centres. The FOMC maintained its target range for the federal funds rate at 0 to 1/4 per cent and continued to anticipate that economic conditions, including low rates of resource utilization and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The governing council of the European Central Bank (ECB) decided in its meeting on 6 May to leave the key ECB rates unchanged at 1 per cent. The Governing council also decided several measures to address the severe tensions observed in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards stability of price stability in the medium term. In particular, the Governing council decided to conduct interventions in the Euro zone public and private debt securities markets, under a Securities Programme, to ensure depth and liquidity in those market segments which are dysfunctional.

London inter-bank offered rate (LIBOR) that banks charge each other for 3-month loans saw a marginal increase of 15 bps during May-10 and recorded a monthly average of 0.46 per cent; Similarly, the longer-term rates, 6-month and 12-month LIBOR saw a moderate increase of around 18 bps and 17 bps respectively to average around 0.66 per cent and 1.13 per cent respectively.

Meanwhile, the spread between the average daily KIBOR and LIBOR narrowed during the month with the spread between the 3M KIBOR and 3M LIBOR recording 42 basis points as compared to 56 basis points during the previous month. Interest rates on KWD showed a slight variation from last month across different maturities; 1-month KWD deposit rate increased by 1 bps compared to last month to end the month of April at 1.08 per cent. So far this year, the rate saw a drop of 29 bps from Dec-09 compared to the plunge of 87 bps during 2009. On the other hand, the 1-month USD rate was almost unchanged from last month rate of 0.25 per cent. The rate saw around 78 bps slash during 2009 from 1.03 per cent in December-08, yet stabilized at 0.25 per cent during 2010.

On the other hand, interest rate on the 6-month and 12-month KWD deposits shed around 24 and 17 bps since Dec-09 to end the month of April at 1.52 per cent and 1.77 per cent respectively. The 6-month and 12-month USD deposit rates, which shared a similar plunge since the beginning of the crisis, were almost unchanged from last month to stand at 0.52 per cent and 0.76 per cent respectively.
Fears about Europeís ability to address its large debts fuelled a massive flight-to safety shift towards U.S. debt and away from assets considered to be riskier. U.S. Treasury yields posted sharp drop across all maturities compared to last month amid the sovereign debt crisis in Europe which raised concerns about the future of the common European currency and thereby its adverse impact on global economic recovery. The 10-year yield shed the most during May or around 38 bps to record 3.31 per cent, the largest drop since the Federal Reserve cut interest rates to record low in Dec-08 to spur the economy, on speculation efforts to contain Europeís debt crisis will slow global economic recovery. The 2-year note yield fell 21 bps in May to 0.76 per cent, the biggest drop since February-09. However, 2-year notes have fallen less as investors assume that Federal Reserve has no choice but to eventually raise interest rates, even if not in the foreseeable future.

Oil Market
Up till last month, oil prices have continued to stabilize and register lower volatility along with a general upward trend on the back of the bullish sentiment in the oil market which continued to be driven by rising positive expectations about global economic growth. However, the current month saw oil prices plunging significantly, reaching the lowest level for 2010, as the Euro continued to lose ground against the dollar and U.S. oil inventories continued to build. OPEC Reference Basket showed fluctuating prices during April, as the Basket moved to a low of USD 66.84/b after reaching a high of USD 84.36/b at the beginning of the month. On a monthly basis, OPEC oil prices averaged USD 74.48/b during May-2010, down by 9.7 per cent from last monthís average of USD 82.47/b and closed the month at USD 71.88/b. However, the average price since the beginning of the year reached USD 76.58/b, while the average price for 2009 was at USD 61/b compared to an average of USD 94.45/b for 2008. The Reference Basket plunged to a low of USD 66.84/b, a level last seen since early October-09, hence breaking the upward trend witnessed during the current year. On the other hand, the Kuwait Blend Spot Price FOB averaged USD 71.53/b and closed the month at USD 71.77/b, down from USD 84.05/b recorded at the end of April.

World economic growth forecast is kept unchanged at 3.5 per cent for 2010, as stated in OPEC monthly oil report for May-10. While the US, Japan and China showed encouraging signs of a recovery, the Euro-zone has just managed to avoid a spill-over of the sovereign debt crisis of Greece to other economies. OECD growth remains unchanged at 1.9 per cent, as the US forecast was increased to 2.8 per cent from 2.6 per cent and the Euro-zoneís forecast was revised down to 0.6 per cent from 0.7 per cent. China is expected to grow by 9.5 per cent in 2010 and India by 7.1 per cent. The global economy is improving; however the challenges of sovereign debt in the developed countries, the ability of China to avoid overheating and persistently high unemployment levels need careful monitoring.
In 2010, global demand growth is expected at 0.9 mb/d, in line with the previous monthís forecast. Although the economic recovery shows signs of improving momentum, important risks remain that could impact demand growth expectations for this year. China has been among the main drivers behind oil demand growth so far this year, which should continue for the rest of the year despite the recent price increase in its gasoline and diesel sales.

Non-OPEC supply is forecast to increase by 0.53 mb/d over 2009 to average 51.67 mb/d. Supply growth remained relatively steady with the previous forecast experiencing only a minor increase of 30 tb/d; healthy production figures in the first quarter by many non-OPEC producers supported the revision. The first quarters experienced the biggest revision of 0.30 mb/d which was partially carried over from 2009. The rest of the quartersí supply expectations encountered upward revisions with the second quarter seeing the next largest increase. The overall supply forecast remained relatively stable with Developing Countries expected to have the highest growth followed by the FSU and China, while OECD supply is foreseen to decline in 2010. On a quarterly basis, non-OPEC supply is seen to average 52.04 mb/d, 51.58 mb/d, 51.32 mb/d and 51.74 mb/d respectively.
OPEC total crude oil production averaged 29.25 mb/d in April, indicating a minor increase of 0.01 mb/d from the previous month. All OPEC Member Countries crude production experienced a minor change in April compared to the previous month, with Iraq indicating the highest decrease and Nigeria showing the highest increase. OPEC crude oil production, excluding Iraq, stood at 26.91 mb/d, up 0.06 mb/d from the previous month.