As recently as 2008, private sector investment firms in Kuwait were symbolic of the country’s financial development. They played a key role in managing the privately owned savings that the oil economy had generated. Affluent Kuwaitis did not have to turn to foreign institution to look after their wealth; there were home grown players who could do this for them.

Kuwaiti banks have also endured a difficult time. Recovery is under way, but there is still some way to go

The past two years have been particularly tough for the private finance sector. Investment Dar, which had been one of the leaders of the Kuwaiti financial sector became the first group to seek protection under the country’s April 2009 Financial Stability Law. It is preparing to sell off major assets to finance a revised debt restructuring plan that it has offered to creditors. But which elements of the group’s diverse portfolio will find ready takers in the present economic climate remains unclear.

Global crisis aftermath in Kuwait

The humbling of Investment Dar is emblematic of the setbacks suffered by Kuwait during the global crisis and its aftermath. Such was the success of the sector that in 2006 Forbes magazine rated Maha al-Ghunaim, the founder of Global Investment House (GIH) – a Kuwaiti investment company licensed by the Central Bank of Kuwait – one of the world’s 100 most powerful women. Yet GIH, too, ran into a debt crisis in 2008-09 and was forced to negotiate a restructuring deal with private creditors.

There are now signs of a slow, but steady revival in the investment sector. GIH is already making payments to creditors under its new recovery plan.

National Investment Company (NIC), which saw the value of the assets it manages plunge by more than a third in 2008, is also slowly rebuilding, although its profits are still volatile. And there has been a similar recovery path at Kuwait Financial Centre (Markaz).

There are now signs of a slow, but steady revival in the investment sector. GIH is making payments

Both NIC and Markaz derive their income mainly from the performance fees they earn as managers. This leaves their profit flows heavily exposed to the short term fluctuations of the world’s investment markets. They have been spared the sort of traumatic losses endured by Investment Dar because of their direct investment in overseas businesses and projects.

Kuwaiti banks have also endured a difficult time. Recovery is under way, but there is still some way to go, as they ride out the cost of heavy loan write-offs. As recently as June, ratings agency Standard & Poor’s affirmed a negative outlook for Kuwait Finance House, the country’s second largest bank (and one of the world’s largest Islamic finance institutions).

While individual financial institutions are slowly regaining their strength, the government and parliament have been looking to the longer term. After implementing essential crisis management measures in late 2008 and in 2009, the focus has been on structural plans and reforms that could stimulate greater liberalisation and diversity in an economy that still rests heavily on oil-funded state spending.

After tough haggling, parliament approved the government’s new five-year development plan for the country. In May, a privatisation law was passed.

But the practical implementation of these initiatives will not be easy in what remains a cautious business climate. In particular, this may not be the most favourable time to test the appetite of investors with new disposals of state corporations.

Kuwait privatisation moves

The most likely first candidate for privatisation is Kuwait Airways, which is to be transformed into the legal form of a private shareholding company by March of next year, albeit with a board of directors elected by parliament.

The aim is that the public will then be invited to invest. But the company faces major challenges in establishing a viable long-term business strategy, in the face of fierce competition from more strongly resourced rivals, such as Dubai’s Emirates and Qatar Airways.

The readiness of Kuwaiti investors to buy shares in the airline will be an interesting gauge of how far the general recovery in confidence has developed. It will be also a real test of investors’ readiness to back a long-term business proposition that may not offer attractive early returns.

While strong oil revenues continue to sustain the state’s spending power, the private sector has not yet fully recovered its confidence. This partly reflects the recognition that financial stabilisation has yet to be completed.

For Investment Dar, the big challenge over the past six months has been how to develop a restructuring plan that convinces creditors and allows the company to start disposing assets. Its debt stood at $3bn by the end of March.

Internationally it is the future of Dar’s 51 per cent holding in the British luxury car maker, Aston Martin that will attract most media coverage. Another attractive signature asset is Park Lane Properties in London.

Of rather less certain value is Oqyana Real Estate, which owns 19 islands of The World artificial archipelago off the coast of Dubai. Investment Dar needs to ensure is that the cash flow from the asset sale will be enough to ensure it can honour the improved debt restructuring offer, which it is making to creditors. An earlier offer failed to secure their unanimous approval and the group has now offered to pay out KD1.4bn ($5bn) over the next eight years.

When Kuwait’s financial crisis first developed in late 2008, it was most dramatically manifested through the problems at Gulf Bank, at that time the country’s second largest conventional banking institution. But the decisive invention of the central bank helped to contain the problem.

Market slump in Kuwait

Less spectacular, but more damaging over the long term, was the slump in the stock market, which slashed the value of the assets through which many Kuwaiti investors had collateralised their borrowings. The impact of the domestic bourse downturn was compounded by the wider crisis in the real-estate sector, both at home and internationally, further eroding the value of asset portfolios and thus of lending security.

And it is investors with a heavy real-estate exposure, such as Dar, who have had particular difficulty in restoring their position. The Oqanya slice of The World, for example, has been transformed from a large stake in one of the most sought after prestige projects in the Gulf, into a long-term speculative play whose capacity to generate returns will depend on a recovery in the Dubai elite property market.

This project to develop almost 2,000 luxury homes, two hotels and a marina was budgeted pre-crisis at $3bn. But in today’s uncertain market no one can be sure either of the costs or of the potential long-term financial return.

Property assets in Kuwait itself, catering for the domestic housing market, may offer greater comfort to their financial backers.

The country has a proven resilient demand for new housing, and an affluent domestic market. The price economics may have altered, but they should offer a smoother route back to profit. In terms of recovery, GIH is almost a year further ahead of Dar, having signed a restructuring accord with 53 lending banks in December 2009.

It has since managed to make substantial repayments of debt, despite the uncertain condition of the Middle Eastern markets where it has most of its investment stock.

By mid-October, the group had paid off $151.4m, almost 9 per cent of its debt to the banks, as well as almost $32m in interest. It has also paid $70.9m to bond holders.

The restructuring has not been a comfortable process for GIH. The group has been forced to embark on a phased withdrawal from its more volatile capital investments and refocus on its core activities of investment banking, brokerage and asset management, which are mainly fee-based and carry much lower levels of risk.

While these traditional activities continued to produce steady revenues – even through the downturn – GIH had, like Dar, left itself dangerously over-exposed to the real-estate market. Under the restructuring strategy, the direct real estate holdings were transferred into a special purpose vehicle and earmarked for disposal, when market conditions offered worthwhile prices. GIH said it would initially use the proceeds from any sales of these assets to pay down debt.

Consolidation pressure in Kuwait

For the banking sector, the past year has been one of consolidation. The headline-grabbing crisis at Gulf Bank in late 2008 was quickly contained. But the industry’s recovery from the downturn has been drawn out, as the impact of the problems felt by business and personal clients slowly fed through.

In particular, non-performing loans (NPLs) have continued to erode bank balance sheets and income flows, although the position has been improving at some institutions during the course of this year.

Even institutions that have been well-provided against bad loans have felt the discomfort. Ahli United Bank, for example, saw the ratio of its provision coverage against NPLs fall from a comfortable 127 per cent at the end of 2008 to a just adequate 107 per cent a year later.

Meanwhile, Al-Ahli Bank of Kuwait still had to provide KD6.9m against NPLs in the first half of this year, although this was a lot less painful than the KD16.7m it had been forced to set aside for January-June 2009.

At the large end of the market, even the mighty Kuwait Finance House had to soak up KD204m in impairment charges for 2009.

Burgan Bank endured an increase in the cost of provisioning this year too. Income in the first half of the year was slashed by the need to set aside KD51.1m against NPLs – some 84 per cent up on provisions for January-June 2009.

Overall, such painful medicine does mean that the cost of past economic traumas is now being digested. Kuwait’s banks and investment houses are laying the basis for recovery. As they restore their capital strength, they can begin to look forward to new opportunities.