Kuwait's unexpected 50 basis-point interest rate cut will help reduce borrowing costs for businesses but is not going to be enough to kick-start bank lending without a lasting solution to the country's political crisis.

 

In the first such move since February 2010, the central bank (CBK) said late on Wednesday that it was lowering its discount rate to 2.0 percent, aiming to bolster the banking sector and support the economy.

 

The rate cut will also help to ensure the currency's competitiveness, while price pressures have declined, state news agency Kuna quoted CBK governor Mohammad al-Hashel, who took office in March, as saying.

 

But the stock market rose only 0.25 percent in response, and many bankers and analysts do not expect much real impact from the policy change.

 

"Last night's move is like giving a patient a dose of morphine to lower the pain instead of operating on him and permanently fixing the source of illness," said a Kuwaiti commercial banker, who declined to be identified.

 

"Alternative policies are likely to be more successful, in particular fiscal policy."

 

The CBK, which pegs the dinar to an undisclosed currency basket, considers the discount rate its key policy benchmark.

 

In May, it changed loan-to-deposit ratio rules to boost funds available for lending. Since then, credit growth to the private sector has picked up slightly, to around 5.0 percent in June-August from 2 percent on average in 2011.

 

But that is still one of the slowest clips among the Gulf Arab oil exporters despite a petrodollar windfall from high oil prices. Months of political deadlock have stalled Kuwait's four-year, $108 billion development plan, which aims to diversify the heavily oil-reliant economy.

 

"Against this backdrop, we are not hopeful that the Central Bank of Kuwait's decision to cut its discount rate...will spur an acceleration in lending growth," HSBC said in a note.

 

ROOM TO LEND

 

The latest rate reduction is unlikely to put much downward pressure on interbank rates as they are already at historical lows, analysts said. But it will give banks space to cut both deposit and lending rates without touching margins.

 

The three-month interbank offered rate (KIBOR) was fixed at an all-time low of 0.5625 percent on Thursday, down from 0.6250 percent before the rate cut announcement.

 

Kuwait's banking sector appears to have enough funds to increase lending with the loan to deposit ratio at only 81 percent, below 98 percent in the nearby United Arab Emirates, data show.

 

"The banking sector has some room to expand their loan book if the right credit opportunities arise," said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.

 

In June, the International Monetary Fund said Kuwaiti banks were sound but that weakness in the property and stock markets, and the financial difficulties of investment firms, were forcing banks to take large provisions.

 

"Banks are full of money but there are no good projects," said Adnan al-Dulaimi, director at Mena Consulting in Kuwait.

 

POLITICAL DEADLOCK

 

Kuwait has seen 10 governments since early 2006 because of a long-running row between the elected parliament and the cabinet, which is dominated by the Al-Sabah ruling family.

 

In April, parliament rejected a draft bill on the development plan, which includes a new airport terminal and oil refinery, as opposition deputies accused the government of failing to make progress on major investments.

 

Because of high oil prices, Kuwait's economy is expected to grow a comfortable 5 percent in 2012, analysts say. But the political stalemate means the country has not yet approved its budget for the fiscal year that started in April; and this lack of policy flexibility could make the economy vulnerable when oil prices eventually fall.

 

"They have a policy space, they generate large budget and trade surpluses so the country is well positioned to implement their development plan. It is just a matter of going ahead with it," NBAD's Gokkent said.

 

Kuwait booked a record budget surplus of 13.2 billion dinars ($47 billion) in the fiscal year that ended in March thanks to robust oil income and lower spending than planned.

 

But the country drew just $399 million in foreign direct investment in 2011, or 1.5 percent of the Gulf total, data from the United Nations Conference on Trade and Development show.

 

In July, Kuwait's biggest bank reported a surprise 42 percent drop in second-quarter profit, prompting its chief executive to publicly criticise the government's failure to proceed with economic projects. Political tensions helped to push the stock market to an eight-year low in mid-August.

 

On Wednesday, the cabinet asked Kuwait's ruler to consider dissolving parliament in a bid to clear the way for a new election and end the stalemate.

 

But it seems likely that opposition candidates will perform well again in the next polls, so the political deadlock may simply be reinforced. Meanwhile, unsatisfied pressure for democratic reforms, such as more authority for parliament, could set the country up for worse tensions in the long term.

 

"If they want to revive their non-oil domestic activity, I guess it would be best that they find a lasting solution to this political uncertainty," said Selim Cakir, chief economist for Turkey and Gulf countries at BNP Paribas. - Reuters