Shoring up banking sector is No 1 priority - Kuwait

A Kuwait state fund launched to stabilise the bourse is seeking long-term share investments, the Kuwait Investment Authority (KIA) said on Sunday as the Gulf state's central bank urged more efforts to face global turmoil.

In a joint news conference with Kuwait's sovereign wealth fund, the central bank said shoring up the banking sector would remain its top priority, after it was forced to rescue Gulf Bank in October from steep losses in derivatives trading.

The government and central bank have launched a series of measures to boost confidence in the stock market and banking system, hit by concerns investment firms might run into trouble due to their exposures to international markets.

"The purpose of the stock market fund is long-term investments and to restore the confidence in the market," KIA Managing Director Bader al-Saad told reporters.

In November, Kuwait asked the KIA to set up the fund to stabilise the second-largest Arab bourse, which fell 38 percent last year during a regional stock market rout triggered by the global financial crisis.

Saad declined to give the value of the fund but Finance Minister Mustapha al-Shamali said last month it would invest at least 1.5 billion dinars ($5.42 billion).

Gulf Bank shares, suspended in October, would only resume trading once a new board of directors is formed and a revamp was concluded, Central Bank Governor Sheikh Salem Abdul-Aziz al-Sabah told reporters, without saying when that would happen.

Sheikh Salem said Kuwait needed better laws to tackle the financial crisis and enable mergers across sectors. He mentioned examples including mandatory convertible notes, a bankruptcy law like the Chapter 11 US rule or special purpose vehicles to allow investment or other firms to outsource assets.

"Inflation is not the priority right now. (The priority) is to stabilise the economy," Sheikh Salem said, adding the focus should be on the financial sector since all other sectors depend on its health.

He said he hoped the government, which budgeted expenditures of almost 19 billion dinars in the fiscal year ending in March, would spend the same amount next year to keep the economy growing during a global downturn.

Oil prices have slumped about $100 a barrel since hitting a record above $147 a barrel in July. Oil revenues accounted for about 97 percent of Kuwait's total revenues in the first nine months of 2008, according to central bank data.

"The year 2009 won't be easy ... State spending is the engine of the economy," Sheikh Salem said, adding that monetary policy had only a limited impact in the current phase compared to a more effective fiscal policy.

Inflation, which had been the central bank's primary concern for most of last year because it kept hitting record highs, had stabilised and declined, the governor added, without giving details. Inflation in Kuwait was 11.6 percent in August.

In addition to the bourse fund, Kuwait set up a bailout fund for investment firms to help them cope with the crisis.

Sheikh Salem declined to discuss proposals to help Kuwaiti investment firms which have run into trouble due to the global financial crisis.

Two of the Gulf state's biggest investment companies, Global Investment House and Islamic firm Investment Dar, said last month they were seeking financing of up to $1 billion each to help meet debt obligations.

In a move that shocked the market, two ratings agencies downgraded Global last month, saying the investment bank had failed to meet a debt obligation. Global then said it was talking with foreign lenders about securing financing.

Investment Dar also said last month it was in talks for loans of up to 300 million dinars to help refinance short-term loans and was considering selling parts of luxury car maker Aston Martin.

The central bank governor declined to say whether Kuwait would lower the key discount rate again to stimulate the economy. It cut the rate by 50 basis points to 3.75 percent in December. (Reuters)