Assignment 2: Emerging markets and investment banking services You are to write a report on a specific emerging market as a possible market for a foreign investment bank to enter. You should consider the opportunities that the market offers for the investment bank which has some overseas operations but does not currently operate in that specific market. Ask for a list of countries considered suitable emerging markets for your assignment if you have not already received this. You should consider, in particular: 1. Evaluating the economy as a suitable market for an investment bank. This analysis might include things such as industries, regulations, financial markets, competition, openness, growth and so on. 2. Explaining the structure of the investment banking industry in that country e.g. the investment banks (both domestic and international) operating there, some data on market shares, league tables, revenues and profitability etc. where available. Briefly assess the factors which explain why the industry has developed in that country in the way it has – consider what changes have taken place in the last two or three years and what factors have driven these changes – make sure you use up-todate materials. 3. Identifying potential management problems and conflicts of interest for investment banks operating in that market and suggest possible solutions. Stage 1: As early as possible in the course investigate emerging markets to identify one which interests you (from the list provided by the module leader) and on which you have sufficient information, and then obtain approval for your choice from the module leader. Failure to get approval will mean that the assignment will receive no marks. A claim afterwards that insufficient information was available will not be accepted. You will be provided with a list of recommended markets; please discuss any other options before going ahead with them. Stage 2: Email the module leader with a summary of the assignment during the week beginning Monday 10 December 2018 outlining the points you will be making. Stage 3: Complete the assignment (maximum 2,000 words) and hand it in on or before the date specified in your assessment diary. You should ensure that the materials which you obtain about the country are applied to investment banking. This is not an assignment about the whole of the finance sector or about the retail banking industry. Your report, in appropriate format, should be no more than 2,000 words, but brief definitions of services or relevant key facts about the market can be included as additional appendices. Supporting materials for assignment 2: The most important sources relevant to this assignment are likely to be journal articles accessed electronically and details of the market you have chosen accessed through the internet, for example from rating agency websites. Source of basic data on individual countries could be the New Internationalist and BBC’s country profiles. You should also use some of the websites of the leading investment banks to find out whether they report any views of your chosen market. The websites for the central bank, the stock market and the finance ministry of the country you are looking at are likely to have some helpful analysis of the financial markets. The Trading Economics website http://www.tradingeconomics.com has helpful material on country credit ratings and some other economic data from different official sources. Broader data on the size and extent of the bond and share markets can be obtained from the BIS website and summary information on the stock market can be obtained from the latest edition of the Economist. Using a broad range of credible sources is part of what you are being assessed on so do use these materials
Kuwait, also known as the State of Kuwait, is located in Western Asia on the end of the Persian Gulf and shares its borders with Saudi Arabia and Iraq. The country has a population of slightly more than 4.2 million. However, about 70% of the populations are foreigners who are mostly expatriates in various fields. The country is a major oil producer globally and has very large reserves of oil which are still to be exploited and drilled. It is the sixth largest country in terms of oil reserves with its currency being the most valued currency globally. It has one of the highest per capita incomes in the world. This paper discusses Kuwait’s economic investment climate in relation to investment banking.
Kuwait is a constitutional emirate that has a political system that is semi-democratic with the Emir as the country’s head of state. The country has a hybrid political system that is divided between the country’s appointed government and the elected parliament. Kuwait’s constitution was promulgated in the year 1982. The country is considered as one of the freest countries in terms of political rights and civil liberties.
Kuwait is a relatively small country. However, its open economy has allowed it to prosper becoming one of the world’s wealthiest economies. Its crude oil reserves amount to about 102 billion barrels; slightly more than 6% of the total world reserves (Central Intelligence Agency, 2018). The country has hinted out that it plans to increase its oil production to four million barrels per day by the end of the year 2020. Oil and petroleum revenues account for about 92% of the country’s total export revenues and about 90% of the country’s income. In 2015, the country suffered from the reduced global oil prices resulting in a deficit in its budgetary allocations. The deficit grew in 2016 to about 16.5% of the GDP. To resolve the issues, the government of Kuwait implemented cuts in fuel subsidies in August the same year (Central Intelligence Agency, 2018). The action drew mixed reaction from the public and outrage from the country’s national assembly prompting the Amir to dissolve the National Assembly of Kuwait. The deficit, however, reduced to about 7.2% of the GDP. To finance the remaining deficit, the Kuwait government issued international bonds worth $8 billion (Central Intelligence Agency, 2018). The government saves about 10% of all the government revenues for future generations in a fund known as Future Generation Fund (Central Intelligence Agency, 2018). The factors above would pose a big challenge to investment bankers especially when oil prices plummet and bank deposits reduce. Investment bankers can mitigate such risks by diversifying their investments to other sectors in the economy.
About 74% of the country’s total workforce is from the public sector as the country depends largely on oil to finance its operations and capital projects (Central Intelligence Agency, 2018). The economy is not diversified despite the government’s effort to finance several reforms aimed at diversifying the economy from oil dependency. Kuwait’s GDP (Purchasing Power Parity) in 2017 was $289.7 billion compared to $299.7 and 293.2 billion in 2016 and 2015 respectively. The GDP reduced by 3.3% in 2017, 2.2% and 1% in 2016 and 2015 respectively (Central Intelligence Agency, 2018). The GDP-per capita in 2017, 2016 and 2015 amounted to $65,800, 69,900 and 69,200 respectively. Gross national savings in 2017, 2016 and 2015 amounted to 35.4%, 32.9% and 37.1% of the GDP respectively (Central Intelligence Agency, 2018). Agriculture contributes about 0.4% of the GDP in 2017 while industry and services contributed 58.7% and 40.9% respectively (Central Intelligence Agency, 2018). In 2017, the country’s labor force was approximately 2.695 million majority, about 60% being non-Kuwaitis. The unemployment rate in 2017 was 1.1% while the inflation rate in 2017 was 1.5% and 3.5% in 2016. The country’s central bank’s discount interest rate was 2.75% in 2017 and 2.5% in 2016. Commercial bank’s lending rates in 2017 and 2016 were 4.68 and 4.5% respectively. The major export partners for Kuwait are South Korea 18.3%, Japan 11.5%, China 17.4%, India 11.2% while Singapore and US account for 6.3 and 5.7% in 2017 while major import partners are China 13.5%, UAE 9.5%, US 13.3%, Germany 5.4%, Saudi Arabia 5.8% while Japan, India and Italy account for 5, 4.7 and 4.5% respectively for the same year. Kuwait Dinar currently exchanges at 3.294 US per 1 KWD. The factors above indicate that Kuwait’s economic climate is suitable for investment banking.
The Central Bank of Kuwait controls all the commercial banks in Kuwait and sets the lending rates. The country’s central bank’s discount interest rate was 2.75% in 2017 and 2.5% in 2016, while the commercial bank’s lending rates in 2017 and 2016 were 4.68 and 4.5% respectively (Central Intelligence Agency, 2018). The stock of the country’s narrow money in 2017 and 2016 amounted to $33.68 billion and 31.86 billion while broad money amounted to $33.68 billion and 31.86 billion. The country’s domestic credit stock was $111.2 billion in 2017 and $103.4 billion in 2016.
According to Kuwaiti’s central bank (2018), the country’s commercial and investment banks have a good performance record. The capital adequacy ratio in 2017 was 17.8 while shareholders equity to total assets was 13.0 while non-performing loans to total loans was 1.8 for the same period. Net non-performing loan (NPL) to net total loans was 1.2 while NPLs coverage ratio was 282.6. Regulatory liquidity ratio for same period was 22.5. The average exchange rate US$(FILS) in 2018 was 301.30 while money supply, M2 and M1, were 38,419 and 10,866 million KWD respectively for the second quarter of 2018 (Central bank of Kuwait, 2018).
Kuwaiti’s economy is dominated by the services and industry sector. The agricultural sector is almost non-existent. The economy depends on the services and industry sector to finance its operations through taxes and revenues from oil (Fanack, 2018). Taxes contribute about 41.8% of the GDP while the rest are mostly from the petroleum and oil revenues. The finance, business and real estate are the leading sectors in services industry in Kuwait accounting for 17% of the sectors contribution to the country’s GDP. The 2008/9 global financial crisis dealt a big blow to the country’s financial services (Fanack, 2018). Money supply and the country’s credit condition deteriorated from bad to worse during the last quarter of 2008 while the money market went through a very rough period. Kuwait’s Stock Exchange lost about 45% in autumn 2008, while local investors including major investment companies in Kuwait lost about USD 32 billion during the same period (Fanack, 2018). The country’s government enacted the financial stability law that bailed out struggling banks after two major investment companies collapsed and went into receivership (Fanack, 2018). The government established a USD 5.4 billion fund for emergency bailouts of ailing banks and to shore up Kuwait Stock Exchange. Several investment banks were also assisted financially to return back to profitability while the government provided also financial guarantees for all the country’s banking and investment sectors. The financial assistance packages for Kuwait banks, however, attracted stricter risk management reforms (Fanack, 2018).
Kuwait has a large source of workers from foreign nations while the GDP-per capita in 2017, 2016 and 2015 amounted to $65,800, 69,900 and 69,200 respectively. And the Gross national savings in 2017, 2016 and 2015 amounted to 35.4%, 32.9% and 37.1% of the GDP respectively (Central Intelligence Agency, 2018). These factors demonstrate the great potential that the country has in terms of savings and disposable income. The country is ranked at number fifteen globally. The consumer’s household consumption is 43.1 % of the GDP while government consumption is 24.5% of the GDP. With the unemployment at the lowest levels (1.1%) the country’s circulation of money is very high and together with other factors mentioned above like very high GDP per capita the country has very high potential and opportunities for investment banking services. Services offered in most financial institutions in Kuwait include checking accounts, demand accounts, savings accounts and term deposits. Investment banking also offer loans, corporate credit facilities (like overdrafts) including consumer, short term/long term, installment and expatriate loans, import or export letters of financial credit, corporate letters of guarantee, syndicated loans, foreign exchange lines and structured funding and project finance, medium, and long term loans among other financial services.
The country’s economy is relatively fragile as it is hinged on oil exports which make up about 92% of the country’s exports and about 50% of the country’s revenues. The constant fluctuation of oil prices in the international market makes the country’s economy to be unpredictable. In 2015, the country suffered from the reduced global oil prices resulting in the country incurring a deficit in its budgetary allocations (World Bank, 2018). The deficit grew in 2016 to about 16.5% of the GDP. To resolve the issues the government of Kuwait implemented cuts in fuel subsidies in August the same year (Central Intelligence Agency, 2018). The action drew mixed reaction from the public and outrage from the country’s national assembly leading to the desolution of the National Assembly by the Amir to dissolve the issue. The deficit however reduced to about 7.2% of the GDP. To finance the remaining deficit, the Kuwait government issued international bonds worth $8 billion (Central Intelligence Agency, 2018).
The major barrier to entry in Kuwait’s economy is the religious culture of the citizens. Most of the banking systems are based on Islamic Banking systems. Majority of the population are Muslims and prefer Islamic banking systems compared to conventional Kuwaiti banks. The poor business climate in Kuwait has resulted in about 76% of the population working for the public service as the private sector remains grossly under developed. The government has made it difficult for businesses to invest in Kuwait by extending the waiting period for registration of new businesses.
The investment freedom in Kuwait is 62.5% from the graph while trade freedom is 79.1%. Trade is very significant in Kuwait as total exports and imports make up about 100% of the country’s GDP (Heritage Economic Freedom, 2018). Average tariffs applied is 3% to foreign business resulting in a below average government openness to investment. Nonperforming loans continue to decline as the financial market including banking industry remains well capitalized.
Source: (Heritage Economic Freedom, 2018).
Kuwait has on several occasions tried to institute economic reforms to diversify its economy but failed due to infighting between the country’s government and the national assembly (Central Intelligence Agency, 2018). The poor business climate in Kuwait has resulted in about 76% of the population working for the public service as the private sector remains grossly under developed. The government has made it difficult for businesses to invest in Kuwait by extending the waiting period for registration of new businesses (Heritage Economic Freedom, 2018).
Kuwait’s economic freedom is ranked at number 81 among the world’s freest countries and scores 62.2 however the scores declined by 2.9 point compared to the previous year. The reductions in scores were noted in government integrity, property rights and business freedom. Among the countries in Middle East and parts of North Africa, Kuwait is ranked at position 6 among 14 nations. The country’s failure to promote the private sector has largely restricted the economy to reliance on oil for most of its operations and budgetary allocations. The country’s judicial system is heavily influenced by politics and also lacks transparency. Property rights are however respected in Kuwait though foreigners are not allowed to own any land in the country only the citizens of the Gulf Cooperation Council are allowed to own land in the country. The legal systems have very weak structures and which are not developed. The system makes it very hard for foreigners to enforce contract provisions in court while Emir appoints judges in the country’s courts. Corruption is widespread especially in procurement of government contracts.
The investment climate in Kuwait is not very friendly, especially for wholly owned foreign business entities. The country’s judicial system is heavily influenced by politics and also lacks transparency. Property rights are respected but foreigners are not allowed to own any land in the country only the citizens of the Gulf Cooperation Council (GCC) are allowed to own land in the country. Hence it is difficult to expand any business without the help of the GCC citizens. The legal systems have very weak structures and which are not developed. The system makes it very hard for foreigners to enforce contract provisions in court while Emir appoints judges in the country’s courts. Corruption is widespread, especially in procurement of government contracts.
The country has the best opportunity for investment banking as the GDP per capita is very high while the disposable income is equally high. The country’s saving culture is very impressive but the opportunities favor local citizens than foreigners. The best option is enter the market through a joint venture or to acquire a financial interest in several countries. It is also reassuring to note that during the financial crisis of the year 2008 Kuwait’s government enacted the financial stability law that bailed out struggling banks after two major investment companies collapsed and went into receivership. The government established a USD 5.4 billion fund for emergency bailouts of ailing banks and to shore up Kuwait Stock Exchange. The country is ready to assist ailing banks but only through implementation of crucial financial reforms. Investing in Kuwait may be a wise decision given its highly valued currency that is usually pegged to the dollar.
Central bank of Kuwait (2018) Conventional Kuwaiti Banks: Financial Soundness Indicators retrieved January 5, 2018 from http://www.cbk.gov.kw/en/statistics-and-publication/statistical-releases/quarterly.jsp?selYear=2018&selMonth=tcm%3A10-127875-1024&selTable=127941&publication-id=10&table-type=2&btn-submit=Submit
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World Bank (2018) Kuwait retrieved January 5, 2019 from http://pubdocs.worldbank.org/en/358541475460667264/Kuwait-MEM-Fall-2016-ENG.pdf