Kuwait stock market
A significant capital market has been developed in Kuwait through the activities of the leading investment companies and the IBK, and with the encouragement of the Government. An active bond market developed after 1973, mostly for international borrowers from the Third World and Eastern Europe. The Central Bank then closed the new issue market in November 1979 as part of its efforts to boost liquidity in Kuwaits money market had reopened.
Despite the issue of a number of new bonds, the market was to close again in September 1982. It reopened in June 1983 with a KD 5m floating rate note bond for the United Bank of Kuwaits subsidiary, UBK Finance, and there followed a KD 14m two-tranche bond offer for the Kuwait Foreign Trading Contracting and Investing Company in November. However, following the collapse of the stock market, the bond market also lost its appeal, and in 1985 and 1986 only solitary domestic bonds were issued. In the last quarter of 1987 and the first quarter of 1988 the Government issued a series of bonds and treasury bills, in an attempt to finance the budget deficit. During 1987 the Central Banks total assets fell by 31%, to KD 1,458.7m, mainly as a result of a decline in foreign deposits, which decreased by 44% to KD 681.8m, by the end of the year.
In 1952 Kuwait had established what was, prior to the Iraqi invasion of August 1990, the worlds twelfth largest stock exchange. The amount of capital holders seeking investment outlets in Kuwait, and the innate entrepreneurial spirit of locals, generally pushed the prices of shares far above their real value. In April 1978, in an attempt to stem this unhealthy trend, the Government sanctioned the reduction in nominal value of shares to one dinar, a move which resulted in a split of share values to 10% - 13% of their current value, which broadened the base of the market.
Alongside the official market, an unofficial stock market, the Souk al-Manakh, also developed. After 1978 many Kuwaitis had invested in Iraq, and, as a result of the Iran-Iraq War, a sever cash-flow crisis emerged in Kuwait. In 1982 the liquidity shortage which this caused was particularly severe for the Souk al-Manakh.The unofficial market had been based on the use of post-dated cheques and the hope of continuously rising share prices. Then in September 1982 the system collapsed, as smaller creditors prematurely presented their post dated cheques at a time when many dealers were unable to pay. The collapse of the Souk al-Manakh initiated a major crisis in Kuwaits financial system, the impact of which lasted for several years.
Government measures to alleviate the crisis involved the immediate formation of the Kuwait Clearing Co, to register and process all cheques involved, and the establishment of a KD 500m fund to protect, and pay, the smaller debtors whose investors were bankrupt. In August 1983 the Government urged the settlement of debts at the market price at the time of transaction, and set a maximum premium of 25% on post dated cheques.
In August 1984 the official stock exchange moved to new premises, and its permanent floor officially opened in April 1985. The Souk al-Manakh stock market was closed on 1 November 1984, and trading in shares was restricted to the official stock exchange and to a parallel market which it operated. To avoid a repetition of the Souk al-Manakh crisis, measures were introduced to limit the activities of brokers on the official market. Before being allowed on the floor, brokers had to pay a registration fee and provide a guarantee for KD 1m, while a percentage of brokers commissions had to be paid to the exchange.
The government bore the brunt of the crisis and was forced to inject large sums into the banking system to restore liquidity. At the end of November 1985, the Minister of Finance and Economy made the following recommendations; 33 companies should be dissolved; a number of the remaining 47 companies should be merged ; from March 1986 the KIC was to purchase the companies that closed, on behalf of the Government ; and companies registered in the Gulf that fell outside the jurisdiction of Kuwait were urged to comply with the Governments recommendations.
These measures appeared to be necessary, owing to the fact that 24 of the 36 companies that had closed, and were under consideration for purchase by the Government, had incurred losses exceeding 50% of the paid-up capital invested in them. It was estimated that by mid-1986 this scheme had cost the Government approximately KD 121m. In May 1989 it was reported that stock market activity was disappointing, and measures to deregulate the stock market to some extent were to be introduced before the end of the year in the hope that a reduction in restrictions would encourage investors. Also in May it was announced that the Soul al-Manakh stock exchange was to be re-opened in June, to allow trading in companies that had failed to meet the minimum capital requirements of the official stock exchange.
In May 1988 the Government permitted citizens of all GCC member states to purchase shares on the Kuwait Stock Exchange. Then, in 1992, the exchange was opened to inter-national firms for the first time. In 1995 the exchange became the most active share market in the Arab world. Strong corporate earnings, excess liquidity and the privatization policy launched by the Kuwait Investment Authority maintained the buoyancy of the stock market, and in June 1997 it was reported that the average market price of shares had increased by some 30% since the start of the year.
By early 1999 the stock market was in decline as a result of the regional economic downturn, the absence of reforms to reduce the budget deficit and poor company results for 1998. In 1998 legislation was passed further rescheduling debts owed as a result of the collapse of the Souk al-Manakh in 1982 and in May 2000 a draft law was passed allowing foreign investment on the stock exchange, which, combined with the higher level of petroleum prices, was expected to lead to a recovery in share values ;however, it was reported in early 2001 that they had continued to fall, reflecting a lack of confidence in the Government economic reforms.
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