KUWAIT WANTS A BAILOUT….BLOCKS INVESTMENTS

Posted By on October 25th, 2009

Kuwaiti Politicians Feud Over $21 Billion Consumer Bailout Plan

By Fiona MacDonald

Oct. 25 (Bloomberg) — Lawmakers in Kuwait, which is richer per capita than Germany, are demanding a government bailout of all consumer loans, reviving a power struggle that’s already shut down the assembly twice in 18 months.

At least half of the 50 elected lawmakers say they’ll back a plan for the government to buy all 6 billion dinars ($21 billion) of bank loans taken by Kuwaiti citizens to buy homes, cars, holidays and other purchases, write off interest payments and reschedule the rest. The government opposes the bailout. Parliament convenes on Oct. 27 after a four-month break.

“It’s my right as a citizen to enjoy the wealth and resources of my country,” said Essa al-Malki, a 32-year-old teacher of philosophy and psychology, who took out a 15-year 23,000 dinar loan in 2000 and supports the plan.

The row has dominated the local media during parliament’s recess, signaling a fresh dispute between Kuwait’s government, appointed by the emir, and elected lawmakers who are seeking broader powers and have blocked key investment programs in the past. Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah last dissolved parliament in March saying relations with the legislature were “ruined.”

Kuwaitis stepped up borrowing as a decade-long oil boom through 2008 fuelled growth. The emirate’s economic output per capita was about $46,000 in 2008, more than Germany or the U.K., according to International Monetary Fund data.

Kuwait has a restrictive citizenship regime, with one-third of its 3.4 million residents holding citizenship. The bailout plan will only apply to Kuwaiti citizens.

Repayment problems escalated in 2006 as the central bank raised interest rates as high as 6.25 percent to curb inflation. Legislators have criticized the government and central bank for failing to regulate lending properly.

‘Not Very Sensible’

“I will not hesitate to use any constitutional tool to pass a bill for purchasing and rescheduling citizens’ consumer loans,” lawmaker Daifallah Bu Ramiah said in a phone interview.

Bu Ramiah said at least 100,000 Kuwaiti borrowers face legal charges after falling behind on debt repayments. The government says that’s exaggerated. A total of 278,000 Kuwaitis held consumer loans at the end of last year, according to Kuwait-based Al-Shall Economic Consultants. There’s no official data on defaults.

It’s “not very sensible” for the state to shoulder all the debt burden, Finance Minister Mustafa al-Shimali told state news agency KUNA on Oct. 10. He said the government may instead expand a 500 million dinar “defaulters fund” already set up to help Kuwaitis unable to repay loans.

Moral Hazard

That’s the solution favored by banks, said Abdul Majeed al- Shatti, chairman of the Kuwait Banking Association, and also of the country’s second-biggest publicly traded lender, Commercial Bank of Kuwait SAK.

While government purchase of the loans would bring some benefits for banks it would also create “moral hazard,” al- Shatti said in a phone interview. “It’ll affect the role of the private sector in the economy because you’re distorting market conditions.” He declined to discuss his own bank’s loans.

The plan could also create “a dangerous precedent with regional reverberation,” as other Gulf countries face rising defaults, said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh.

Provisions for bad loans in the United Arab Emirates, the Arab world’s second-biggest economy, jumped 44 percent in August from a year earlier to $7.2 billion. Banks in Bahrain, where two Saudi-owned lenders were taken over by authorities this year after defaulting, face a rise in non-performing loans, Moody’s Investors Service said Aug. 17.

Iraq War Damages

Kuwaiti lawmakers who support the bailout point to the government’s willingness to spend money abroad, such as a proposed $25 billion investment in Iraq to solve a dispute over war damages. Kuwait is owed the money by Iraq, which invaded in 1990, and may invest it back into that country.

“The government does nothing better than offering large financial aid to other countries, yet strictly refuses to purchase and reschedule loans of its citizens,” lawmaker Musallam al-Barrack said.

Many bailout supporters come from tribal areas where living standards are lower than in the city, and have been pushing for more handouts and subsidies on top of a program of government jobs and welfare.

Kuwait’s government can veto legislation passed by the parliament. The assembly can override that with a majority of two-thirds in a vote that includes the government’s 16 ministers.

Blocked Investments

Investments blocked by government-parliament standoffs include Project Kuwait, a plan to bring international oil companies to develop fields in the country’s north. Lawmakers also opposed a joint venture with Midland, Michigan-based Dow Chemical Co., scrapped last December, and a planned fourth oil refinery that was put on hold in March.

Kuwait is the sixth-biggest OPEC producer. Its benchmark stock index slumped 30 percent in the past year.

Failure to resolve the loans dispute will delay needed investments and exacerbate social tensions, said Hajjaj Bu Khudour, an independent Kuwaiti economist.

“If we leave it, it will continue to cause disagreement and government resignations and dissolutions of parliament,” he said. “The cost of that to Kuwait’s development could be billions.”

To contact the reporter on this story: Fiona MacDonald in Kuwait at fmacdonald4@bloomberg.net

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