KSE trading seen surging after 8.4% growth in Jan

KSE trading seen surging after 8.4% growth in Jan

GCC markets witnessed mixed trends as four out of six regional indices recorded monthly gains in Jan-08. However, the biggest bourse in the region in terms of market capitalization , Saudi Arabia, witnessed strong selling pressure as it benchmark index reported monthly decline of 13.4% in Jan-08. However, buying interest was seen in the Kuwait markets as its index recorded 8.4% growth during the month. We believe that the trading activity is likely to increase in the coming month as the investors take positions after analyzing annual results and corporate announcements.

Kuwait Budget 2008/09
Kuwait’s Cabinet has approved the country’s budget for the fiscal year 2008/09 (Apr’08 to Mar’09) which still needs to be sanctioned by Kuwait’s Parliament. The revenues estimated for 2008/09 is KD12.68bn, around 52.4% up from KD8.32bn estimated in the 2007/08 budget. As expected, a majority of Kuwait’s estimated revenues for 2008/09 will be on account of oil revenues. The oil revenue is projected to comprise around 92% of the total revenues for 2008/09. The oil revenues for 2008/09 is estimated at KD11.65bn, up 56.4% from KD7.45bn estimated for 2007/08. The non-oil revenues for 2008/09 is estimated at KD1.03bn, up only 17.9% from KD0.87bn estimated for 2007/08. The rise in non-oil revenue is attributed to an increase in taxes on net income and earnings for non-oil companies and fees on goods and services.

Similarly the total expenditures for 2008/09 is estimated at KD17.80bn, up 57.5% from KD11.30bn estimated in the 2007/08 budget. The higher expenditure projected for 2008/09 is due to the cabinet decree targeting the settlement of the KD5.47bn deficit to be paid in installments to the Public Institute For Social Security (PIFSS), which is Kuwait’s social security system. As per IMF Article IV report published in April 2006, PIFSS has accumulated a substantial actuarial deficit, which amounted to around KD7bn in 2004 and this move appears to be an attempt at recapitalization. However it is important to note that this expenditure of KD5.47bn is non-recurrent in nature. On account of this significant increase in the expenditure, Kuwait’s Cabinet has estimated a deficit of KD5.12bn for 2008/09. And considering the fact that around KD1.27bn of national revenue will be contributed to Reserve Fund for Future Generations (RFFG), the overall deficit for 2008/09 is estimated at KD6.39bn.


Without considering the transfer of KD5.47bn to PIFSS (which is non-recurrent in nature), the total expenditure projected for 2008/09 is KD12.33bn, which is 9.1% higher than the previous year. Though the break-up of this expenditure is not available at this point of time, we expect to see higher allocation of capital expenditure. Increase in capital expenditure has positive impact on the overall economy with maximum impact on sectors like construction, cement and real estate. This will have a trickle-down effect on other areas of economy as well by contributing to achievement of targeted rates of growth and creation of new jobs.
It is important to note that historically Kuwait has projected the budget on a conservative basis. This is illustrated from the fact that for the fiscal year 2006/07, Kuwait achieved an actual budget surplus of KD5.20bn as against an estimated budget deficit of KD2.60bn. For the fiscal year 2007/08, Kuwait has estimated a deficit of KD2.98bn. However during the first six months of current fiscal, the country has already recorded a revenue surplus of KD5.75bn.


For the budget for the fiscal year 2008/09, sources at the Ministry of Finance have quoted that the oil revenue was estimated on the basis of a daily production of 2.2 million barrels of crude. We believe the Kuwait has again projected the budget revenues on a conservative basis. The actual average production for the first nine months of current fiscal was 2.48mb/day and we do not foresee a substantial reduction in view of higher prevailing oil prices. On the expenditure side, Kuwait has also historically spent less than budgeted figure. This is illustrated from the fact that for the fiscal year 2006/07, Kuwait’s actual expenditure was KD10.31bn as against an estimated expenditure of KD11.12bn.
However the fiscal year 2008/09 might be different than the previous years. We might see an actual deficit in 2008/09 (unlike the previous years) in case the entire amount of KD5.47bn is paid during the year to PIFSS. As per our estimates, the actual deficit for 2008/09 will be lower than the projections by Kuwait’s Cabinet.


IPO frenzy in 2007
The number of new companies which offered parts of its shares to public (IPOs) reached 41 during the year 2007. Out of these 41 companies, 38 have been listed at the time of writing of this report and three are yet to be listed. Out of these, 36 issues were listed in 2007. Out of the 41 companies which floated their shares in 2007, 28 companies were from Saudi Arabia, six from UAE and two each from Oman, Qatar and Kuwait and one from Bahrain.
Out of 41 issues, maximum number (16) were from insurance sector, followed by services (9) and Industrial (8). Alahli Takaful Co has been the biggest gainer since float, gaining 1,017.5%, followed by Al Ahlia Cooperative Insurance Co. and Malath Cooperative Insurance and Reinsurance gaining 915% and 825% respectively. It is notable that we have found a negative correlation between the price change (on listing and after one month of float) and oversubscription. It means that appreciation in the price of any offering in secondary market is heavily determined by its fundamentals rather than just frenzy.
Improved capital market conditions have been driving the IPOs in the GCC region which have resulted in investors’ growing interest in the regional equity markets. Private companies and family businesses are opening up to the prospects of a public listing. There is also tremendous rise in disposable income and savings on the back of increasing oil prices has enabled investors to lap up the offerings made by the companies. This is also attracting corporate to go for listing as can be seen from the fact that more than 50 companies are looking to tap the market in the medium term.


Market activity
GCC bourses saw 39.9bn shares being traded in the month of Jan-08 as compared to 27.5bn in the previous month. Also, the value of shares traded on the bourses increased to US$136.7bn in Jan-08 as compared to US$100.5bn reported in the previous month.
The breadth of GCC stock markets was skewed towards decliners in Jan-08 as 280 stocks registered monthly decline as compared to 249 advancers. The strong sell-off seen in the Saudi market can be seen from the fact that the Saudi bourse saw only 13 advancers as compared to 97 decliners in Jan-08.