BUSINESSARAB TIMES, MONDAY, JULY 13, 2020

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There is growing need for sovereign long-term yield curve in the region

PPP a key tool for govt to achieve objectives of Vision 2035Following is the last part of a Gulf Bank Economic Research Unit in-sight report on Kuwait’s Project landscape following the outbreak of COVID-19 and the drastic fall in oil price. — Editor

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Report prepared by Gulf Bank Economic Research Unit

A number of GCC corporates have been active in the debt

markets, especially in the recent past. Considering the surge in cor-porate and sovereign issuances and the need for development of domes-tic debt market, many have been advocating for the need to establish a domestic sovereign yield curve, which can be used as a benchmark to support the development of a vi-brant debt market. In the absence of any sovereign benchmark yield curve in the GCC region, businesses are forced to borrow debt at a high premium than what their risk may warrant. Varied issuances at the sovereign level would help in de-velopment of a yield curve, which in turn will help in better pricing of projects by financial institutions. The systemisation of yield data would put a downward pressure on the cost of capital due to increased transparency and make more proj-ects viable for execution.

Public Private Partnerships (PPP)

Public Private Partnership (PPP) are emerging as the preferred path to bring private investors in to fund major projects, reducing the fi scal burden on governments, and per-haps as importantly, bringing pri-vate sector expertise and effi ciency to the table. Making greater use of the PPP model in infrastructure delivery will help reduce public fi -nancing pressures, while also pro-moting development. The Govern-ment of Kuwait has embarked on an ambitious PPP program, which promotes collaboration between the public and private sectors to develop quality infrastructure and services for Kuwaiti citizens.

PPP will be a key tool for the government to achieve the objec-tives of Kuwait Vision 2035. With COVID-19 outspread taking its toll on the economy in the near term, it becomes imperative for the govern-ment to take necessary steps to pro-tect existing PPP projects and build confi dence among prospective par-ticipants by showing an intent that the government is willing to be supportive during tough economic conditions.

PPPs are expected to face revenue generation challenges in addition to diffi culties in running day-to-day operations due to the weakening of the economy. The government’s willingness to provide liquidity to the fi nancial sector will bode well for PPP participants, as they would be able to receive support in the short and medium term. During nor-mal circumstances, too much sup-port from the government would create a moral hazard and set a bad precedent. However, considering the damage that inaction could do in the long term, the option of proac-tive intervention seems to be the best way forward. Government needs to provide fi nancial guarantees to all critical projects and set parameters to classify each of the projects and the type of support that each would be provided. For projects where there would be a risk of low demand, di-

rect payments could be provided to the special purpose vehicles of the project in order to make debt ser-vice payments, retain suppliers and limit the damage caused by fall in volumes. Keeping the supply chain intact by making periodic payments would ensure that once demand picks up, the project could return to its sustainable self. Projects that are of national importance must re-ceive a government bailout, keeping national interests in mind. A clear timeline or the duration up to which there would be government support should be established based on how the crisis progresses and should be clearly communicated to all partici-pants. If proper mitigation of dam-ages in the near term is carried out, it would boost PPP activity in the medium to long term.

In PPPs, private parties are largely responsible for the design, construction, operation, and main-tenance of an infrastructure asset, implying that they are assuming bulk of the development, fi nance, construction and market risks as-sociated with the project. Govern-ments should make this entire ex-ercise as seamless as possible for investors, and iron out any regula-tory and legal issues that can affect the performance of the asset. The Government has established a clear regulatory framework for imple-menting PPP projects, constituting a reference point for all stakehold-ers, the laws and regulations estab-lishes high levels of transparency and certainty throughout the PPP process – both key to the success of a PPP program. The New PPP Law creates a greater degree of certainty, reliability and fl exibility for foreign contractors, investors and lenders that participate in PPP projects in Kuwait.

The Kuwait Authority for Part-nership Projects (KAPP) serves as the main body responsible for PPP projects implementation. KAPP aims to utilise private sector skills and expertise to maximise value for money and service quality. KAPP is currently in the process of initiating several high-impact projects in the power, water/wastewater, educa-tion, health, transportation, com-munications, real estate, and solid waste management sectors.

RecommendationsThe current phase where the

economy is facing a slowdown is a critical stage where government in-

tervention is greatly required. Sup-portive measures are required from both short and long-term perspec-tives. ■ Providing stimulus to the non-oil sectors will help in mitigating the risks caused by COVID-19 and also aid in achieving economic diversifi -cation. Funding infrastructure proj-ects through greater capital expen-diture will have a positive impact on Kuwait’s diversifi cation objectives. ■ Providing monetary support in the form of additional liquidity facilities and accelerating project payments would protect ongoing projects and help them in weath-ering the near-term disruptions caused by COVID-19. Eliminating bureaucratic challenges will help in achieving faster payment cycles, which would in turn boost project activity.■ Most projects are fi nanced by us-ing a combination of equity (in the form of cash and/or Equity Bridge/Shareholder Loans) and debt (bank loans, bonds etc.) on a limited re-course or project fi nance basis. Banks will remain important fi nan-ciers, particularly in the early stages of new projects. However, boosting infrastructure fi nancing will require broadening of the potential group of investors and a broader mix of fi nancial instruments. ■ Pension funds, insurance compa-nies and other long-term institutional investors have very large and growing long-term liabilities and need long-term assets in their portfolio, very little of which is allocated to infrastructure. Alternative fi nancing, in the form of infrastructure investment funds and bonds, can also help to tap into some of the vast resources of international capital markets. ■ Rising climate awareness, strong environmental policies and regula-tions, and demand for green and in-frastructure projects in the region will likely support the development of the green fi nance market. This is likely to comprise of a diverse combination of conventional green bonds and green sukuk, which could lower the cost of capital and help provide the massive amounts of funding for projects in the pipeline. ■ Improvements in dealing with delays in payments, an ambitious PPP program, and improvements in construction permits and property registration are steps in the right di-rection by the government to revive the projects market.

Case Study: ‘Listing’ of Shamal Azzour Al-OulaShamal Azzour Al-Oula was the

first company to be established as a Public-Private Partnership (PPP) project and the first PPP to be offered for public subscription. KAPP successfully concluded the public offering of its stake in Sha-mal Azzour Al-Oula. The offering was equal to 50% of Shamal Az-zour Al-Oula stake totalling 550 million shares, which was equiva-lent to 100% of KAPP’s stake in the company’s capital.

The company is the owner and operator of Azzour North One Power and Water Plant, which is the fi rst privately-owned gas-fi red combined cycle power and wa-ter desalination plant established

under the Independent Water and Power Project (IWPP) Law. The IWPP and PPP Laws, which re-quires the State to offer 50% of the total ownership of PPP proj-ects to Kuwaiti citizens through a public offering, mandate the public offering. This forms an in-tegral part of a predominant gov-ernment effort to include citizens in the ownership of mega projects that are offered to private sector institutional investors. In addition to providing attractive investment opportunities to citizens, the PPP projects also help empower the private sector to take the lead in growing the non-oil economy of the nation.

US manufacturing PMI jumps to 14-month high of 52.6

Optimism on a V-shaped recovery fuels risk sentimentReport prepared by NBK

United States

The jobs report in June showcased the rebound in the US labor market as all US states started

lifting their strict lockdown measures. The la-bor market made greater progress than expected in June. Last week’s simultaneous release of the monthly employment report and the weekly job-less claims data offered diverging snapshots of the economy. One reflecting a flood of rehiring, par-ticularly at restaurants and retailers, as state econ-omies reopened. The other reflecting a jump in new virus cases, which has led many of those same states to halt or even walk back reopening plans. In details, Payrolls rose by a more-than-expected 4.8 million in June after an upwardly revised 2.7 million gain in the prior month, according to La-bor Department figures. The data, which offer a snapshot of mid-month conditions, also showed the unemployment rate fell for a second month to 11.1%. That was a bigger decline than anticipated, but the rate remains far above the pre-pandemic half-century low of 3.5%.

While President Donald Trump said the jobs fi gures proved the economy is “roaring back,” the pace of recovery may slow or even stall if employ-ers grow cautious and delay rehiring workers. In fact, some have already been laid off a second time. Paired with the coming expiration of the federal government’s extra US$600 in weekly unemployment benefi ts, the economy could take another hit in the months ahead.

Another side of the labor market, the employ-ment-population ratio has tumbled from 61.2% back in January to 52.8% in May. Suggesting 47.2% of Americans are unemployed, according to Bureau of Labor Statistics. This ratio takes a wider look at the employment picture. It consid-ers adults not in the labor force and captures those who were discouraged about the prospects of fi nd-ing a job, whereas the unemployment rate looks at people actively looking for a job. With many Americans jobless, the pace of recovery may take time as the largest economy depends greatly on

consumer consumption.US manufacturing reboundsThe US manufacturing ISM PMI jumped to a

14-month high of 52.6 for June, from a previous monthly reading of 43.1. A reading above 50 in-dicates growth, which accounts for 11% of the US economy. Economists polled by Reuters predicted earlier a reading of 49.5. Weaker global demand and worries about a second wave of infections may pressure growth prospects.

Equities, foreign exchange and fi xed incomeEquities globally rallied as investors assessed

the data coming from global economies and the much talked about V shaped recovery possibil-ity. With labor market data and manufacturing data exceeding expectations, equities fl ourished. Yet the gains were capped with the US record-ing record daily corona virus cases and fears of a second wave of infections spurred fear in inves-tors’ sentiment. Since we are at corporate earnings season, the corporate reports should shed some further light on the status of different sectors of the economy.

In the fi xed income complex, we saw the US-10-year treasury yield fl uctuate throughout the week amid a range of positive and negative news, hovering between 0.62% and a high of 0.71%. Fi-nally retreating to 0.66% after the US recorded its highest corona virus daily cases of 50K+.

In the FX sphere, the US dollar edged lower last week losing as much as 0.62% of its value against major rivals amidst increased risk-taking senti-ment. The greenback had its fi rst weekly drop in a month this past week.

Europe & UKFrench President Emmanuel Macron asked his

government, including Prime Minister Edouard Philippe, to resign on Friday as the French presi-dent seeks a fresh start after a disastrous municipal election last month. Macron named Jean Castex as his new Prime Minister. As a result to these sudden political changes, the euro slipped to 1.1224 after reaching last week’s high of 1.1303 on Thursday.

On the data side, the Eurozone manufacturing

PMI came at 47.4 beating expectations of 46.9. Germany and France both recorded higher PMIs than forecasts and previous readings. Neverthe-less, global demand remains a constant worry especially with the fears of increased global CO-VID-19 cases.

UK Data The UK economy is fi ghting on many fronts to

stay resilient and rebound. On one hand we have the ongoing Brexit situation, and on the other we have the effect of the global pandemic that’s pres-suring the UK and world economy. Last week, UK’s Q1 GDP fi nal fi gure report showed that the economy contracted by 2.2% on a quarterly basis, worse than the market expected 2% contraction. This contraction in the economy indicates that Q2 fi gures might be worse, as more health restrictions were introduced In the second quarter which might hinder economic activity further.

On another note, the UK eased quarantine rules by exempting arrivals from 50 countries from the 14-day quarantine requirement said Transport Secretary Grant Shapps. Meanwhile, Prime Min-ister Boris Johson urged his fellow Britons to act with responsibility as the leisure sector prepares to open for the fi rst time in 3 months on Satur-day. The Sterling pound had a stellar week gaining as much as 1.53% on the US dollar and broke the 1.25 level last week before retreating on Friday to 1.2450 levels.

CommoditiesOil regains tractionOil prices rose after the highest quarterly in-

crease of 92% in almost 30 years following a re-port pointing to the fi rst drop in US crude stock-piles since May. The report said that inventories shrunk by 8.16 million barrels last week. While inventory levels spurred some optimism, the ques-tion remains on the demand outlook for the world’s second largest economy remains blurry with ques-tions on the success of the efforts to contain the outbreak. On a weekly basis, both Brent crude and West Texas Intermediate gained around 4% and closed the week at $42.80 and $40.32 respectively.

China auto sales off 22.4%in first half of 2020 – dataBEIJING, July 12, (AP): China’s auto sales rose 1.8% in June over a year earlier but fell by double digits for the fi rst half of 2020 after the country shut down to fi ght the coronavirus, an industry group reported.

June sales of SUVs, sedans and minivans in the industry’s biggest global market rose to 1.8 million, according to the China Associa-tion of Automobile Manufactur-ers.

That was down from May’s 7% gain following the reopening of the economy but a rebound from February’s record 81.7% plunge after dealerships and other busi-nesses were shut to contain the virus outbreak.

For the six months through June, sales were off 22.4% from a year ago, CAAM reported.

Total vehicle sales, including trucks and buses, rose 11.6% in June to 2.3 million.

Demand already was weak before the outbreak due to con-sumer jitters over a slowing economy and trade tension with Washington. Sales fell 9.6% last year, the second straight annual decline.

That has hurt global automak-

ers that are looking to China to propel sales growth.

It also squeezes cash fl ow at a time when global and Chinese brands are spending billions of dollars to develop electric vehi-cles under pressure to meet gov-ernment sales quotas.

Demand for electric vehicles weakened last year after Bei-jing reduced subsidies that helped to make China their big-gest market, accounting for half of global sales. The government said in April it will extend sub-sidies through 2020 to shore up sales.

June sales of gasoline-elec-tric hybrid and pure-electric vehicles fell 33.1% from a year earlier to 104,000, according to CAAM.

For the fi rst half, sales were down 37.4% at 393,000.

Also in the first half, SUV sales declined 14.9% from a year ago while sedan sales were off 26%.

Sales by Chinese brands fell 11.6% in June from a year ago to 590,000 units. Their market share shrank 5 percentage points from the same time a year ago to 33.5%.