US embassy cable - 05KUWAIT4644

UNCLAS KUWAIT 004644 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ARPI SWALKER AND RSMYTH, EB/FO FOR JSALOOM, 
TREASURY FOR LMACDONALD 
LONDON FOR LTSOU 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, PGOV, PREL, KU 
SUBJECT: GCC EQUITIES: INVESTMENTS OR LOTTERY TICKETS? 
 
 
This cable is sensitive but unclassified; please protect 
accordingly.  Not for internet distribution. 
 
1.  (SBU) Summary.  During a meeting with the Ambassador 
October 26, National Bank of Kuwait (NBK) CEO said 
skyrocketing GCC equities could presage a Gulf equivalent of 
the U.S. "dot com" market bust.   In order to "shake up the 
market a bit," NBK will host a December 18 symposium to 
examine the economic integrity of GCC equity trades.  Citing 
the Central Bank Governor as the only "responsible" economic 
voice today in Kuwait, NBK officials expressed concern that 
there is "a risk of the bubble bursting" due to market 
instability.  End Summary. 
 
2.  (U) On October 26, Ambassador met at the National Bank of 
Kuwait (NBK) with CEO Ibrahim Dabdoub (at his invitation) and 
the bank's Senior Economist, Ms. Randa Azar-Khoury, regarding 
the December 18 "NBK Symposium on GCC Equity Markets: 
Fundamentals-Driven Markets or Asset Bubbles?"  Dabdoub and 
Azar-Khoury expressed NBK concern over the unprecedented 
"stellar performance" and volatility of the region's equity 
markets over the past three years. 
 
3.  (U) The NBK officials noted that improved economic 
fundamentals and a market-friendly post-Iraq War political 
environment initiated the growth.  Nevertheless, they said, 
they are convening the symposium for regional experts to 
examine whether the growth represents a sustainable trend or 
is simply more excess liquidity pursuing fewer real assets. 
As Dabdoub put it, "It's like a blood pressure of 200 over 
100, very high, very much like the 'dot com' bubble in the 
States." 
 
4)  (U) Azar-Khoury laid out some statistics.  For example, 
the regional price-to-earnings ratios that normally run in 
the low teens have soared to multiples of 40 and 50 times in 
the UAE and Qatar.  Moreover, in a region that traditionally 
has prized cash dividends, current yields have sunk to the 1 
percent range.  A "sizable part of Kuwaiti bank loan 
portfolios is being used to finance equity trades; there is a 
risk of the bubble bursting," she said. 
 
5)  (SBU) Dabdoub, noting that NBK's board is "quite 
conservative," cautioned, "We are worried about a crash."  He 
said that the only "responsible" economic policy voice in the 
Kuwait government today is that of Central Bank Governor, 
Sheikh Salem Saud AbdulAziz Al-Sabah.  "The rest speak 
rubbish; they are afraid of being seen as Cassandra these 
days," he said.  Dabdoud continued that the symposium was 
designed to "shake people up a little."  He used a metaphor 
as the rationale for the symposium, "It's better to fall from 
the second floor and break a leg than from the third floor 
and break your neck!"  He said that today "we are at 200 
percent GDP in the market and 860 times the net cash flow for 
companies purchased in the market."  "Saudi Arabia is even 
worse," he cautioned. 
 
6)  (U) Azar-Khoury pointed out that the Central Bank 
Governor had "imposed a global loan to deposit ratio of 80 
percent," and that this had helped slow down the rate of 
credit growth.  Nevertheless, she complained, the 
government's "wanting people to be happy in the good times," 
placed the financial system at risk needlessly, especially so 
in this time of high petroleum prices. 
 
7)  (SBU) Azar-Khoury found it "alarming" that the ratio of 
market capitalization to private sector GDP was more than 800 
percent and that the market capitalization in September was 
200 percent of Kuwait's GDP in 2004.  Ambassador agreed that 
the situation was volatile and noted that countries often are 
judged as much on their fiscal responsibility in good times 
as in bad times.  For example, he mused, how might Kuwait get 
a functioning tax system in place during a time of 
unprecedented, oil-generated surpluses?  It was, he remarked, 
"a wealth management exercise," with no easy solution.  He 
applauded the GOK's determination to withstand pressure from 
some in the National Assembly to use budget surpluses to pay 
off citizens' private debts. 
 
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Visit Embassy Kuwait's Classified Website: 
http://www.state.sgov.gov/p/nea/kuwait/ 
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LEBARON