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Thu 21 Aug 2008 04:00 AM

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Desert dreams

Spurred by oil and a buoyant banking sector, Kuwait's economy is expanding at a terrific pace.

Spurred by the rising price of oil and a buoyant banking sector, Kuwait's economy continues to expand at a terrific pace. Arabian Business profiles three of the desert state's key growth sectors.

Banking on success

The fourth-largest OPEC oil producer has become one of the world's most vibrant economies, and at its heart lies the banking sector, where the stock of Kuwait's major players has risen almost as fast as the price of oil.

Credit ratings agency Moody's describes Kuwait as 'having one of the most robust banking sectors in the GCC region'.

According to the Oxford Business Group, the country's banking profitability reached record levels in 2007 with profit growth averaging 30 percent per year between 2004 and 2006.

The strong position of the sector is also reflected in its share of the Kuwait Stock Exchange. The total market capitalisation of banking firms has averaged 32 percent growth over the past five years and finished 2007 with a 35 percent share, according to the National Bank of Kuwait (NBK), the Gulf state's biggest lender by market value.

Credit ratings agency Moody's describes Kuwait as having "one of the most robust banking sectors in the GCC region, benefiting from the country's outstanding economic performance in recent years, as well as fairly effective banking supervision." Its strong position is secured by the "backbone" of the financial sector, the Central Bank of Kuwait, established back in 1968.

"The Kuwaiti banking sector has a robust system in terms of risk management and a regulatory authority which is keeping a very vigilant eye over the industry's activity," agrees Naveed Ahmed, financial analyst at Global Investment House in Kuwait.

With just 14 banks, nine of which are publicly listed, the industry has a great deal of potential to grow, particularly abroad. "There is a lot of room for growth as there are very few competitors at the moment," says Ahmed.

"The banking sector is doing quite well but a lot of it is on the back of operations outside of Kuwait," agrees Laura James, Kuwait analyst at the Economist Intelligence Unit (EIU) in London. "That should change in the future."

Islamic bank Kuwait Finance House (KHF) and NBK are the country's two largest financial institutions and are both 100 percent Kuwaiti-owned. Together they account for more than half of the banking sector's capitalisation on the Kuwait Stock Exchange.Both banks' second quarter results showed positive growth - NBK posted a 16 percent rise in Q2 profits, while KFH reported Q2 profit advanced 29 percent.

Fuelled by increasing demand for Islamic services the country's Islamic banking sector is enjoying tremendous growth, and now represents 25 percent of the total bank assets in the country.

Keen to tap into the world's growing Islamic banking sector, NBK plans to generate as much as 50 percent of its profit from overseas operations by 2015, compared to 25 percent today.

Kuwait is currently Wataniya's biggest market and the company's growth will come from expanding outside of the GCC.

It currently has branches in most regional financial centres including London, New York and Singapore, and aims to start an Islamic bank in Switzerland - in partnership with a Saudi company - to offer an offshore haven for wealthy Muslims.

While KFH is the country's largest Islamic finance institution, other smaller banks such as Boubyan Bank and Kuwait International Bank are also faring well against the larger competition.

Boubyan Bank, an affiliate of Sharia-compliant investment firm Investment Dar, posted a 40.2 percent rise in Q2 net profit in July, while the smallest publicly traded commercial lender in Kuwait, Bank of Kuwait and the Middle East, announced in June it had received approval from the central bank to convert into an Islamic institution.

Despite the sector's obvious growth potential, however Ahmed does warn that the central bank's curbing of consumer loans - in a bid to rein in near-record inflation - could also impact the banks' potential to lend to expatriates.

Upwardly mobile

Fuelled by rising mobile penetration rates and expansion abroad, Kuwait's mobile segment is as highly regarded as its banking sector - and is considered by some to be one of the world's strongest and most advanced telecoms markets.

The country enjoys high mobile penetration rates, which currently stand at 90 percent and are expected to reach 100 percent by the end of this year.Kuwait currently has two mobile operators, Zain and National Mobile Telecommunications Company (Wataniya), a unit of Qatar Telecommunications Company.

Wataniya is the smaller of the two operators but last month posted a 39.3 percent rise in subscribers to 10.37 million, which boosted its revenues by 19.7 percent to $858.7m in the first half of the year.

"Kuwait is currently Wataniya's biggest market and the company's growth will come from expanding outside of the GCC. Going forward, they'll have to look out for acquisitions or bidding for new licences abroad," says Chandresh Bhatt, vice president of research at Global Investment House.

The country's largest operator and the third-largest Arab telecoms company, Zain, is already enjoying success abroad - particularly in Africa where it is already active in 14 countries.

"Zain has a mixed portfolio in Africa, where some of the countries are not doing well, but others are making profit," notes Bhatt at GIH.

Last week the company started selling shares in the Gulf's biggest capital hike this year. The mobile operator hopes to raise as much as $4.45bn to help fund expansion across Africa and the Middle East.

The company has outlined plans to expand into Saudi Arabia and in June said it would probably apply for a mobile operator licence in South Africa, if the government offers a licence there.

While analysts agree that expansion outside Kuwait's home market is essential, opinion remains divided as to how the introduction of a third mobile operator at the end of the year will affect the existing two telcos.

"Both companies have enjoyed great success so far and we are positive for 2008, but from the beginning of 2009 onwards there will be pressure on both following the introduction of the third operator," suggests Bhatt.

"I don't think they will necessarily suffer," says James at EIU. "It is a fairly saturated market already and to some extent they seem to be looking into value-added [products] with people getting new phones in addition to existing ones."

"People have the money to do that so it may not affect the operation of the existing firms that much, at least in the short term," she adds.The new telco will be part public and part private. Once launched, the government will retain a 24 percent stake in the new firm while another 26 percent will be owned by Saudi Telecom.

Meanwhile, reports in last week's papers suggested that the IPO of the remaining 50 percent of the third operator will commence on Sunday August 24.

Industrial strength

Keen to reduce its reliance on oil, which currently accounts for more than 90 percent of the country's total revenue, the Kuwaiti government is slowly making progress in the development of its industrial sector.

Currently, when not including refineries, the industrial sector represents just 3.2 percent of GDP, according to the Oxford Business Group. In a bid to stimulate growth the government set up the Public Authority for Industry, and the Industrial Bank of Kuwait.

Established in 1973 the Industrial Bank of Kuwait is a specialised bank dedicated to supporting industry in Kuwait by financing loans to projects that were unable to negotiate terms with commercial banks in the agriculture and industry sectors.

The National Industries Group Holding, an affiliate of family-owned Kharafi Group, is currently one of the Middle East's largest manufacturers.

The firm is diversifying away from its core construction materials business by investing in petrochemicals, engineering and metal industries projects. The company has invested almost $1bn in stainless steel and petrochemicals projects and is eying several projects in the Middle East.

The country is also keen to push its petrochemical industry. State-owned Kuwait Petroleum Corp, which in July posted a 74 percent increase in first quarter profits compared to the same period last year, is investing in a series of ventures abroad.

Projects include an $11bn joint plastics venture with Dow Chemical Co in Michigan, and a planned refinery in Southern China with Sinopec Corporation.

Kuwait's expansion of its industrial sector is however, hampered by the country's lack of appropriate land on which to develop industrial plants and expand existing sites - a problem the state aims to rectify with a series of projects scheduled for construction.

"There is a big land issue for the local industrial sector and also for other sectors," says James. "Much of the land is owned by the government and any attempt to sell it off or even in build, operate and transfer deals attracts huge attention in parliament".

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