BUSINESS SUNDAY, OCTOBER 19, 2014 Rationalizing subsidies : A right move

AL-SHALL WEEKLY ECONOMIC REPORT

KUWAIT: The subsidy invoice in the public budget tourism and the special medical insurance. amounts to more than KD 5 billion 22 percent of the We stand firm with any correct beginning implying current budget allocations. It is higher than the alloca- some hope in reform though it is a feeble hope with- tions of all public budgets in the beginning of the out remedy of the core of the problem, or forming the third millennium. About 60 percent of subsidy expens- exemplary public administration in its approach and es go to the power generation, water and transporta- policy. tion means fuel. Adding the subsidy invoice to the direct and indirect salaries and wages, both military Public administration and civil, the obligation to salaries and wages, or their We stated in a previous report that the public support, will reach KD 16 billion which is unsustain- administration represented by the Council of Ministers able if we take into consideration the newcomers to and the National Assembly failed to pay attention to the labor market. The problem of waste and consump- all warnings about a forthcoming weakness in the oil tion has indirect repercussions. Its domestic overcon- market and they ended the last term session by sumption is deducted from the country’s share approving a budget with record allocations and assigned for export which consequently cuts down the increase by 10.5 percent over last fiscal year’s alloca- general revenue and increases the unnecessary tions 2013/2014. We also mentioned that what hap- expenses to build more power plants to meet the pened was contrary to all the declared goals of the overconsumption. It also contributes to increasing development plan which is supposed to commence in environmental pollution levels and perhaps unneces- April 2015. It is also contrary to the agreement with sary addition to the traffic congestion. On the side of the Higher Council for Planning and Development revenues, it helps to expand the gap of the public which includes all the concerned ministers in the gov- finance and the opposite can be achieved when ernment. Very briefly, each public administration in rationalizing consumption. any country obtains a general power of attorney which The government’s orientation towards rationalizing is revocable in democratic states but is irrevocable in power consumption is 27 years old -since 1987- which non-democratic ones. The purpose of such power is to is slightly longer than half the age of the declared gov- assume the responsibility of construction and to avoid ernment’s orientation to diversify income resources in the biggest and most serious risks. What happened in its development plans but nothing of which has been Kuwait is the opposite, i.e. failure in construction and achieved. The new orientation as published by Al- aggravating future risks. Qabas newspaper is a proposal that we do not bet on By the middle of the last week -we are unable to its inevitable implementation though it is a correct obtain new figures for Kuwaiti oil price- the Brent oil approach. It is the outcome of a sample study; it classi- average price scored about $ 84.1 per barrel which is fies consumers according to the nature and level of lower by $22.5 per barrel, 21.1 percent, compared to consumption and adopts pricing in accordance with the average price for the first half of the current fiscal ascending brackets. 20 percent of special consumers year 2014/2015 for the same Brent oil. The effect on oil are excluded from any increase while the cost increas- revenues in the event of weak oil market is usually manage its revenues and surpluses. This will not hap- percent of total value of purchased shares (18.5 per- es as per three subsequent categories. In other words, comes doubled as the producing countries cut pro- pen unless a substantial change occurs in managing cent for the same period 2013) and 19.6 percent of there is no increase or 2 fils per KW on the first 3,000 duction to defend price. But they usually do not com- that outcome. total value of sold shares (18.3 percent for the same KW consumption; 6 fils per KW for the second 3,000 ply with what they agreed on; therefore, they lose a period 2013). The sector purchased shares worth KD KW consumption; 10 fils per KW for the next 6,000 KW, share of production while prices continue their drop. The proposed housing strategy 1.259 billion and sold shares worth KD 917.578 million and 12 fils per KW for what exceeds that. Exemption is This occurred twice historically; the first in the eighties The Realtors Association thankfully prepared a vol- with a net trading, more purchasing, by KD 341.850 offered to lower consumption brackets for investment and the second in the nineties. Some regional coun- ume containing aspects of a proposed housing strate- million, indicating a rising share. usages which include the commercial and agricultural, tries would have internally exploded before the inter- gy in Kuwait. The report is an outline of Kuwait’s The third contributor to market liquidity is the or 2 fils per KW for the first 1,000 KW for the invest- vention of the United States in the two instances to Housing Conference held last March. It began correctly clients’ accounts sector (portfolios) which captured ment and 2,000 KW for the agricultural. The maximum limit the oil supply using its power. according to professional convictions but ended with 19.5 percent of total value of sold shares (17 percent price, or 12 fils per KW, is for either of them beyond The situation today is much more serious. Western dominance of the politicians’ orientations and the for the same period 2013) and 15.3 percent of total 4,000 KW consumption. The direct saving result in the interests are less; western alliance’s changed; and the endorsement of the 12,000 housing units per annum, value of purchased shares (18.9 percent for the same power subsidy expenses will be about 20 percent or entire region is scorching with painful geopolitical or the horizontal expansion from border to border. Out period 2013). The sector sold shares worth KD 910.557 KD 570 million if this proposal is implemented. events. The internal conditions in all the regional states of 10 items in the report introduction that summed up million and purchased shares worth KD 716.167 mil- We emphasize that the invitation to rationalize are not quite well, with each and every state being a the main elements of the strategy, we believe that lion, with a net trading, selling, by KD 194.391 million. public spending, whose present level is unsustainable, potential for a forthcoming crisis. Confronting those except for item relating to the sustainability condition, The last contributor to liquidity is the investment is a due call. Starting to rationalize subsidy to give it circumstances by buying political stability with money everything else about power consumption, the infra- funds sector which captured 10 percent of total value only to those who deserve it is a right start. Its timing is no more possible and the future risks are doubling. structure costs, and even the financing and the exces- of purchased shares (5.3 percent for the same period at the beginning of a weakening oil market may facili- The ability to buy time with money has become limited sive land prices is the outcome of the impossibility of 2013) and 7.9 percent of total value of sold shares (4.8 tate its marketing politically. The problem, as we stat- and the damage will increase if more time is wasted in that sustainability and it has no great value. percent for the same period 2013). This sector pur- ed in another paragraph of the report, is that the pub- malice or exchanging blame. It is more important to The report provides abundant information; hence, chased shares worth KD 468.802 million and sold lic administration does the opposite of what it advo- acknowledge the grave and serious situation and then we recommend reading it. It begins by asserting the shares worth KD 367.993 million, with a net trading, cates. It is difficult for it to understand it from a holistic to halt drifting into a no-return position. Examples astounding failure of the housing strategy which was purchasing, by KD 100.809 million. This means corpo- perspective. around us such glides are numerous. endorsed half a century ago under quite different con- rations, companies, and funds gained a trading share Take for instance the contradiction in adopting the In the past few years, the strong oil market, bought ditions in terms of population density, land prices and in the market at the expense of individuals. horizontal expansion in housing to coincide with the stability period to the oil-rich countries when other building costs. Remaining as is without change in the KSE continues to be a domestic stock exchange talk about the necessity of rationalizing power con- countries felled down. However, it was not a sustain- present times and in future cannot be achieved. with Kuwaiti traders forming the biggest trading sumption. Marketing of these due policies should able stability, in Kuwait, the opposite happened. Some valid examples that the report contained like group and sold shares worth KD 4.178 billion, captur- coincide with apparent measures to confront the Financial waste hit the foundations of the competive- the rise in the number of Kuwaiti families from ing 89.3 percent of total sold shares, (92 percent for widespread corruption and halting waste in other ness of the domestic economy. That was not the fault 153.6,000 in 2000 to 250.4,000 in 2013 due to the the same period 2013), and purchased shares worth spending items. The rise in the per capita share in the of the oil market but that of mismanagement of its expansion in the demographic pyramid reaffirms the KD 3.947 billion capturing 84.4 percent of total value health expenses to the highest global levels is unac- revenues. Nowadays, there are uncomfortable indexes impossibility of continuing the horizontal expansion. of purchased shares (91.6 percent for the same period ceptable taken against its deteriorating services and of oil market weakness which is not temporary. It is Under better financial conditions and lower demand, 2013). As such, their net trading, the only ones selling, associating them with populist projects for medical perhaps an opportunity for the return of reason to the shortage in housing units increased from 47.8,000 scored KD 230.782 million. in 2000 to 110.4,000 in 2013 and the waiting period to Other investors’ share, out of total purchased obtain a home is 18 years. Until 2006, there was a shares, scored 12.2 percent (6.5 percent for the same noticeable cancellation of applications due to the pos- period 2013), i.e. doubling the share of investors from sibility of obtaining a piece of land at an affordable outside Kuwait, which is another positive indicator. price and building it with a loan. This is no more possi- And purchased shares worth KD 573.809 million while ble now due to the incredible rise in land prices. value of their sold shares scored KD 368.006 million, The housing situation seems more impossible in 7.9 percent of total value of sold shares, (5.8 percent in the future with continued horizontal expansion. The the same period 2013). Thus, their net trading, more report estimates the accumulated number of applica- purchasing, scored KD 205.803 million. tions for new housing units would score about GCC Investors’ share out of total purchased shares 234.6,000 by 2033 and the waiting period to obtain a formed 3.4 percent (2 percent in the same period home would extend to 43 years. The report estimates 2013), worth KD 156.855 million, while percentage of the required support for about 343,000 homes with their sold shares scored 2.8 percent (2.3 percent in the 600 square meters area is for 95 percent of them and same period 2013), worth KD 131.876 million. As such, with 400 square meters is for 5 percent at about KD their net trading, purchasing, by KD 24.980 million. 102.5 billion excluding inflation, with KD 43.9 billion Relative distribution among nationalities changed thereof for power and water subsidy only. from its predecessor (86.8 percent for Kuwaitis, 10.1 We do not want to go on as we know that the sum- percent for traders from other nationalities and 3.1 mary, which is the belief of the report writers, is the percent for GCC traders) versus (91.8 percent for impossible continuation of adopting the current hous- Kuwaitis, 6.1 percent for traders from other nationali- ing strategy. If we add some complexity to it and cal- ties and 2.1 percent for GCC traders), for the first nine culate what remains after its implementation for months of 2013). This means Kuwait stock exchange salaries and wages, education, health and infrastruc- remained domestic though with more trading by for- ture, etc. we will find out that the strategy victims are eign investors and investors from outside the GCC not the decision makers but the overwhelming majori- than their GCC counterparts with trading prevalence ty of the people. to individuals. Therefore, there must be a return to the core of the Number of active trading accounts between the problem as we stated in two other paragraphs of our end of December 2013 and the end of September report, namely, reforming the public administration 2014 dropped by -76.3 percent (compared with 420.2 especially as we are living in an era with weakening oil percent rise between the end of December 2012 and market whose strength in the past allowed the con- the end of September 2013 as a result of the impact of cealment of all grave sins of the financial policy. listing Warba Bank on active accounts during the peri- od). Number of active trading accounts in the end of Trading features at KSE September 2014 scored about 31,669 accounts, or 9.4 Kuwait Clearing Company issued its report titled percent of total accounts, compared to 32,141 “Trading Volume According to Nationality” covering accounts in the end of August 2014, i.e. 9.6 percent of the period 01/01/2014 to 30/09/2014 (three quarters total accounts for the same month, declining by -1.5 of the year) which was published on Kuwait Stock percent below August’s level in one month. Exchange (KSE) official website. The report indicated that individuals are still the prevailing group though The weekly performance of KSE their share is declining. They captured 53.1 percent of The performance of Kuwait Stock Exchange (KSE) total value of sold shares (59.9 percent for the first for the last week was mixed, where the indices of the nine months of 2013) and about 47.7 percent of total trade volume, number of transactions, and the general value of purchased shares (57.3 percent for the same index showed a decrease, while the trade value period 2013). Individual investors sold shares worth showed an increase. AlShall Index (value weighted) KD 2.482 billion and purchased shares worth KD 2.234 closed at 498.9 points at the closing of last Thursday, billion, with a net trading, more selling, by KD 248.269 showing a decrease of about 11 points or about 2.2 million. percent, while its increase of 44.2 points or about 9.7 Corporations and companies sector captured 26.9 percent compared with the end of 2013.