Companies borrowed excessively, especially in foreign currencies without hedging their exposures, encouraged by implicitly pegged exchange rates. But lenders in the developed economies could not escape blame either. They were only too eager to extend credit, based on the political connections of the borrowers, or on faith in an Asian miracle. Banks stampeded into the region. When sentiments turned, they stampeded out again, equally indiscriminately. The sudden massive outflow of funds, especially through banking lines, left countries in a severe liquidity crunch, and was an immediate cause of the crisis. The punishment meted out by the markets was out of proportion to the crime. The damage was not just the 9% shrinkage in the GDP of the crisis countries, but the social dislocation and political turbulence that followed. Indonesia suffered the worst, even though the IMF made a pre-emptive house call early in the crisis, and pronounced Indonesia’s fundamentals to be basically sound.1 The Indonesian government had pursued prudent macro policies and maintained steady economic growth. But companies had borrowed large sums from abroad, and the banking sector was afflicted by related party lending, poor credits, and weak provisioning. This, together with concerns about KKN – corruption, collusion and nepotism – was enough to turn an initial loss of confidence into a full-blown crisis of the body politic, forcing President Suharto to resign and pushing the country to the brink of chaos. The origins of the Asian crisis thus lay in institutional weaknesses and inefficiencies.
The above indicators unveil the Central Bank of Kuwait’s prudent policy and proactive approach that helped banks to weather one of the most difficult economic crises from a position of strength, and continue providing their services efficiently. Having considered the positive results and resilience of the banking sector, the Central Bank of Kuwait decided to lift restrictions and lay down a map to redirect its regulatory mitigants to prepandemic thresholds. Notwithstanding the banking sector’s sound indicators, high liquidity ratio and strong solvency, the estimated liquidity and solvency ratios above the minimum regulatory thresholds, and outlook of healthy growth, the Central Bank of Kuwait decided to gradually unwind the regulatory mitigants in line with the IMF recommendations. The first phase of our 2-phased transition began early 2022 by withdrawing 50% of the regulatory mitigants. The second phase of withdrawal process shall be completed early 2023 to return to the previous pre-crisis regulatory thresholds. Meanwhile, we shall still support small and medium enterprises by maintaining the same risk weight, and closely monitor the performance of the banking sector and conduct stress testing on its various units. Though the Central Bank of Kuwait is satisfied of the resilience of the banking and financial sector in the State of Kuwait, the developments recently seen in the world and the evolving risks surrounding the prospects of the global economy drive our efforts to protect our economy and banking and financial sectors from external shocks through proper monetary policies and supervisory measures.