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Kuwait’s Financial Crises of in 1977, 1982, 1997 Essay

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The Kuwait Stock Exchange (KSE) is the national stock market in Kuwait. Some companies, such as the National Bank of Kuwait, have existed long before the creation of the stock exchange. Despite this fact, the law on the organisation of the stock market in the country was adopted only in 1962. Moreover, KSE proper was officially established in 1977 (Almujamed, Tahat, Omran, & Dunne, 2017). The Kuwait stock exchange is the first largest and most important stock market among the Gulf countries, as well as one of the most significant in the world. However, Kuwait has experienced many disasters over the past five decades. The Kuwaiti stock market suffered crises at least three times – in 1977, 1982, and 1997. To understand the causes of financial crises in Kuwait, it is necessary to distinguish between external constraints and various internal factors, such as monetary, fiscal and institutional.

The 1977 Crisis

In 1970, Kuwaiti government passed a law to organise the trading process among shareholding companies. After that, the market started to rise rapidly and by the beginning of 1974, it had developed significantly, partly due to forward trading (Hassan, Al-Sultan, & Al-Saleem, 2003). Preliminary forward trading promoted by brokers and investors, who regarded it as an effective and beneficial financial tool, was one of the key factors of the Kuwait stock market growth (Al-Yahya, 2013). Moreover, this situation led to a further pick-up in 1975 and 1976 and increased real estate prices. That is why the Kuwait stock market became one of the world’s largest markets. Such an actively developing economy could not but result in fueling a financial bubble, which was expected to burst (Algharaballi & Goyen, 2012). Consequently, the turnover of the Kuwaiti stock market declined sharply in 1977. Therefore, the government had to intervene to rectify the situation.

The government interfered through acquiring a stake in listed companies and imposing some regulations on market participants. As a result, these measures were successful and contributed to significant improvements in the market. An official stock market was established and standards on trading and forward deals were adopted in April, 1977 (Oxford Business Group, 2015). Furthermore, operations on the stock market started to be monitored to prevent inadequate transactions previously made by unregulated real estate brokers.

The 1982 Crisis: Al-Manakh Crash

The Al-Manakh market was considered, after the stock exchange, the second Kuwaiti market. That is why the Al-Manakh Crisis in 1982, regarded as the most catastrophic event for Kuwait’s economy, had a negative impact across the whole region (Odekon, 2015). This massive market crash led to approximately 90 billion dollars debt (Elimam, Girgis, & Kotob, 1997). One of the main reasons was the fact the authorities did not regulate dealings on this market. Therefore, the circulation of trading Gulf companies was conducted in the Al-Manakh market. Moreover, a post-dated cheque system was used there, which let to the birth of an illegitimate, boundless credit market (Chalk, Fennell, Kireyev, Wilson, & El-Erian, 1997). Apart from that, almost all commercial banks in Kuwait went bankrupt (Oana & Cosmin, 2018). That is why the government had to retake urgent measures.

To accurately estimate the amount of debt, the government established the Kuwait Clearing Company (KCC) in September, 1982. Its functions included collecting, verifying and systemising the financial accounts of individuals and brokers. Furthermore, Kuwait’s government started to purchase Kuwaiti companies’ shares at announced prices. In addition, an arbitration panel was established to authorise settlements reached voluntarily by traders (Al-Sultan, 1989). This body also could determine the form of payment and cancel transactions and contracts. As a consequence, the Kuwaiti government’s involvement in recovering the economy led to passing new laws to maintain the stock market’s operation and economic stability.

The 1997 Crisis

In 1997, the Kuwait stock market rose actively because of the expectation of considerable developments in the region. Moreover, the political and economic stability of the country was another cause for investors’ confidence in the market. The Central Bank’s decision to allow margin trading also contributed to increased stock demand. As a result, banks and investors capitalised on this decision and high trading volume was provided. However, at the beginning of 1998, the market experienced a sharp decline. It appeared due to the Central Bank’s sudden re-establishment, which was aimed at minimising excessive speculation on the stock market.

In conjunction with this situation, as well as overcharging and diminishing rates of return, traders started to take their money out of the market and transfer them to real estate investments. That is why the government had to adopt foreign direct investment and privatisation laws to facilitate and expand the Kuwaiti economy. In addition, higher oil prices and lower interest rates contributed to stabilising the situation on the Kuwait stock market.

Conclusion

The Kuwait Stock Exchange is one of the oldest and most complex stock exchanges not only in the region but even in the world. During the past 50 years, it has experienced several significant crises, which were caused by different factors. Consequently, Kuwait was close to the brink of the economic catastrophe. However, timely and well-designed measures of the government helped to return to financial stability in this country.

References

Algharaballi, E. A., & Goyen, M. (2012). Corporate reporting, security regulation and trading on the Kuwaiti stock exchange (KSE) – Institutional implications for research. Journal of Governance and Regulation, 1(2), 7-23.

Almujamed, H., Tahat, Y., Omran, M., & Dunne, T. (2017). Development of accounting regulations and practices in Kuwait: An analytical review. The Journal of Corporate Accounting & Finance, 28(6), 14-28. Web.

Al-Sultan, F. H. (1989). (The World Bank Working Paper). Web.

Al-Yahya, M. A. (2013). Kuwait – Fall & rebirth. Abingdon, United Kingdom: Routledge.

Chalk, N. A., Fennell, S., Kireyev, A., Wilson, J. F., & El-Erian, M. A. (1997). Kuwait: From reconstruction to accumulation for future generations. Washington, D.C.: International Monetary Fund.

Elimam, A., Girgis, M., & Kotob, S. (1997). Interfaces, 27(1), 89-106. Web.

Hassan, K., Al-Sultan, W., & Al-Saleem, J. (2003). Stock market efficiency in the Gulf Cooperation Council Countries (GCC): The case of Kuwait. Scientific Journal of Administrative Development, 1(1), 1-21.

Oana, O., & Cosmin, T. (2018). Financial crises between the 20th and 21st centuries. “Ovidius” University Annals, Economic Sciences Series, 18(1), 482-487.

Odekon, M. (2015). Booms and busts: An encyclopedia of economic history from the first stock market crash of 1792 to the current global economic crisis of the 21st century. Abingdon, United Kingdom: Routledge.

Oxford Business Group (2015). The report: Kuwait. London, United Kingdom: Oxford Business Group.

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