For several years prior to 2008, the State of Kuwait underwent an economic boom, underpinned by the country's vast natural resources and high oil and gas prices. Kuwait's fiscal revenues rose dramatically and the government accumulated significant assets, mostly held offshore in the country's sovereign wealth fund. On both the corporate and retail sides, high oil and gas prices spurred fast-paced growth in the real estate and construction sectors, while stock market-related lending rose significantly as investors were attracted by increasingly higher returns.

At the same time, Kuwait saw the rapid growth of local investment companies, which resorted heavily to both local and external borrowings to fuel their investments. As global and domestic financial markets tumbled throughout 2008, some of these investment companies started to show liquidity problems as lenders withdrew short-term wholesale funding. In the past two quarters, some local banks, having extended credit to these companies, have begun to suffer weaker profitability and asset quality as impairments on their investment portfolios and provisions for lending have dramatically increased.

"We view this package as a prudent policy response to the challenges to Kuwait's financial system," Standard & Poor's credit analyst Luc Marchand said. "While our analysis indicates that the cost to the Kuwaiti government of stabilizing the financial system could be significant, we do not believe Kuwait's fiscal flexibility would be impaired, mainly because the government's long history of using conservative oil price assumptions in its budget has left it with significant assets and a very low direct debt burden."

© 2009 Mena Report (www.menareport.com)