KUWAIT POLITICAL CRISIS STYMIES BAILOUT LEGISLATION

UNCLAS KUWAIT 000202 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV KU SUBJECT: KUWAIT POLITICAL CRISIS STYMIES BAILOUT LEGISLATION REF: A. KUWAIT 111 ¶B. KUWAIT 79 ¶C. KUWAIT 130 ¶1. (SBU) Key Points: -- Latest political crisis could prevent passage of "rescue package" for months. -- Major investment companies could collapse, including London-traded Global Investment House. -- Leading Kuwait banks in relatively sound shape. -- No GOK proposals for stimulus spending to tackle slowdown. ¶2. (SBU) Kuwait's latest executive-legislative showdown has all but killed prospects for parliamentary promulgation of the GOK's proposed $5 billion economic "rescue" package. An Amiri dissolution of the National Assembly -- and possible subsequent elections -- could forestall by at least two to three months any deliberation of the Government's plans to boost liquidity and aid ailing investment companies, according to some analysts (ref A). ¶3. (SBU) Failure to pass this legislation -- essentially designed to bolster the banking sector and encourage fresh lending, rather than a stimulus plan per se -- would significantly reduce incentive for Kuwait's banks to provide fresh lines of credit to Kuwait's troubled investment companies. A major casualty might be Global Investment House (GIH),which is currently attempting to restructure $3 billion of short-term and mid-term liabilities. Investment Dar, another leading investment company, announced last week that it needs $1 billion in fresh loans to meet short-term obligations. While these two firms are working with international investment banks to restructure their outstanding liabilities, access to international capital is still sharply constrained. The unwillingness of Kuwaiti banks to provide financing -- given the lack of GOK guarantees, as envisaged in the GOK's draft legislation -- would hinder efforts to solve GIH's and Investment Dar's woes. ¶4. (SBU) Post's sources insist that Kuwait's main banks have sound balance sheets, particularly in comparison to many leading U.S. and European banks. Two senior research analysts at National Bank of Kuwait (NBK) told econoffs that, while not dismissing the potential systemic impact of a collapse of the investment company sector, they believed that large Kuwaiti banks' balance sheets were healthy enough to weather likely problems. MUDDLING THROUGH -------------- ¶5. (SBU) Comment: Parliament's failure to approve the GOK's financial legislation would likely adversely affect leading investment companies and further shake investor and consumer confidence, with a corresponding impact on GDP growth. Low oil prices and an essentially flat (or shrinking) budget will likely weigh on growth. MPs' opposition to the bill is focused on the lack of debt relief for Kuwaiti citizens, rather than increased Government spending to stimulate economic activity (Ref B and C). It is unlikely that a new Parliament -- assuming the Amir opts for fresh elections -- would call for enhanced Government stimulus spending. Kuwait's cash reserves and sound banking sector should allow it to muddle through the global economic crisis, however Kuwaitis will feel relative pain, which is unlikely to improve the political climate. End Comment. ********************************************* ********* For more reporting from Embassy Kuwait, visit: visit Kuwait's Classified Website at: http://www.intelink.sgov.gov/wiki/Portal:Kuwa it ********************************************* ********* JONES