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Rating for the recovery

Rating for the recovery

A new Kuwaiti ratings agency claims to have a greater understanding of the regional markets. But that alone won’t solve the underlying problems of the country’s banking sector.

April 18, 2010 3:52 by

When the news came that Amani Bouresli had launched a new ratings agency specifically targeted at regional companies, it shouldn’t have come as a surprise.

The tense relationship Middle Eastern companies have with their foreign ratings agencies is hardening. Earlier in the year, Dubai Holding dropped Standard & Poor’s as its rating agency, “due to its lack of understanding of [the company’s] operations and relationship with the Government of Dubai.”

That Bouresli’s agency is in Kuwait should have been even less of a surprise. The country’s banks have been hammered by the international ratings agencies operating in the region. The same month Bouresli made her announcement, Moody’s released a report that read like a death notice for the oil-producing nation’s banks. “We expect the year-end 2009 results to show significant increase in system non performing loans,” it read.

For years, Kuwait’s banking growth relied on real estate and construction, financial institutions, and personal lending. But the real estate sector in the region has faced a dramatic downturn, with property prices and rents dropping as much as 30 percent in some markets. And many Kuwaiti consumers had invested in the same stocks on local and regional exchanges that suffered heavily in the downturn. Their investments lost value and they were no longer able to make payments.

While individuals are having a hard time making payments, many of the banks were also heavily exposed to the financial institutions and real estate sectors. Without a diverse portfolio to make up for these investments, those banks are suffering.

Kuwait’s banks, like many in the region, are having to increase their allotment of nonperforming loans. The Kuwaiti national assembly early this year voted for a bill that would force the government to bail out the country’s consumers to the tune of 6.7 billion dinars ($23.3 billion). The cash-rich government could afford the bailout, but is against the idea. And if it doesn’t step in to bail out the indebted population, the banks will have to revise their nonperforming loans up again.

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