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Thu 20 Nov 2008 06:31 AM

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Kuwait introduces new repurchase deals

Central bank's move to revamp monetary policy tools in effort to boost investor confidence.

Kuwait's central bank has revamped monetary policy tools by introducing new repurchase agreements as Gulf Arab oil producers stepped up efforts to boost bank liquidity and bolster investor confidence.

In the latest move by Gulf states to unthaw credit markets, Kuwait's central bank said it would offer repo agreements with maturities of one day and one month from Wednesday, in addition to the one-week repo it had offered previously.

Endeavouring to calm investors, Kuwait this week asked its sovereign wealth fund to invest in stocks, as Bahrain looks to improve deposit guarantees and United Arab Emirates committees meet on how to tackle the world financial crisis.

Kuwaiti shares, down more than 30 percent this year, led gains on some Gulf markets on Wednesday as investors took the central bank's move as a cue the state would keep taking an active role at stabilising the market.

"The fear of liquidity is no longer there in the market," said Arunesh Madan, vice president of treasury at Kuwaiti investment bank Global Investment House.

"This means the central bank will provide enough liquidity to banks, so the business of lending which banks usually do on a day-to-day basis will continue."

Analysts said the central bank had deliberately set the new rates well below levels on the interbank market to help channel funds into that the market, driving down rates.

The central bank set the overnight repo rate at 1 percent, the one-week rate at 2 percent and a one-month rate at 3 percent. The one-month Kuwait interbank offered rate was 3.1 percent on Wednesday.

"The reduction in the repurchase rates is aimed at reducing the attractiveness of placing deposits in the central bank, so as to boost liquidity in the interbank market," EFG-Hermes economist Monica Malik said in a note.

Kuwait's central bank governor said the bank had introduced the new repo agreements to give banks more flexibility in managing their assets and liabilities.

"This measure aims towards providing local banks with the flexibility, among other tools available, to accommodate the management of their assets and liabilities according to the respective maturity structure," Governor Sheikh Salem al-Sabah said in a statement to Reuters.

"However it is important to emphasise in this respect that banks normally don't use the repo facility as a means to facilitate the management of their assets and liabilities."

Across the Gulf, policymakers are struggling to shore up confidence as investors fear economies in the world's top oil-exporting region will suffer after oil prices tumbled by more than half in four months.

Gulf states have guaranteed deposits, slashed interest rates, set up emergency funding facilities for banks and funnelled money into stock markets - six of which have tumbled more than 30 percent this year.

"To an extent a bit of the negative press is self-inflicted because we weren't transparent enough," said Nasser al-Shaikh, director-general of the Dubai Department of Finance.

Dubai's index is the worst performer in the Gulf region this year, down more than 60 percent, largely due to expectations the emirate's property sector could face a sharp downturn and government firms would be unable to refinance debt.

Shaikh said Dubai had set up a new panel comprised of government and business leaders to come up with recommendations on how to tackle the impact of the financial crisis on the emirate's economy.

"I think policymakers in Dubai are getting the sense they need to be a little bit more proactive in managing the problem," said Citigroup economist Mushtaq Khan.

But stepping in to prop up stocks was not an option for the emirates, UAE Minister of Economy Sultan al-Mansouri said.

"We are a free market and we are going to keep it open. We are not going to make the same mistakes that other economies have done," The National daily quoted Mansouri as saying.

Other Gulf states have been more proactive in trying to bolster confidence in stocks. The Qatar Investment Authority, a sovereign wealth fund for the world's largest exporter of liquefied natural gas, is taking stakes in listed banks.

"I believe the panic that has gripped the equity investors here is groundless," Qatar's Deputy Prime Minister, Abdullah al-Attiyah, said in Gulf Times, calling the Doha benchmark's nearly 40 percent decline "temporary".

The island kingdom of Bahrain, meanwhile, is looking at raising the guarantee on bank deposits to a maximum of 20,000 dinars from 15,000 dinars, Central Bank Governor Rasheed al-Maraj said in remarks carried by Al-Wasat daily on Wednesday. (Reuters)

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Mark Flap 10 years ago

Er...if you unthaw something (second paragraph) you freeze it. I think that's the opposite of what Kuwait is trying to do.