Kuwait Cabinet resignation reinforces tepid investment case

  • Government (Cabinet) resigns one month into its term after dispute with elected parliamentarians over the house Speaker
  • Breakdowns between the Cabinet (appointed by the Emir) and MPs (popularly elected, most recently on 5 Dec) are common
  • Next Cabinet (18th since 2006) is unlikely to enjoy more constructive relations, so fiscal and reform risks will fester
Kuwait Cabinet resignation reinforces tepid investment case

After 15 years in the region, I feel as if I have written this report many times before. There have been so many breakdowns in Kuwait's Parliament that the latest one (the 17th Cabinet since 2006 resigned on 12 January, merely a month into its term) can hardly be described as prompting a crisis or a sense of turmoil, or a catalyst for a change; it is more akin to another punctuation mark in a numbing narrative.

The top-down investment case in Kuwait equities is tepid and likely remains so: growth is low, fiscal deficit is high, valuation is not compelling relative to history or on an absolute basis, and the MSCI EM index-related inflows have run their course (and with merely a 48bp weight in MSCI EM, Kuwait is not big enough to matter for most active EM funds).

In the region, for oil price upside exposure, there is more gearing in Oman or the UAE, and for oil price downside protection, there is cheaper value and fiscal resilience in Qatar.

Appointed Cabinet vs elected Parliamentarians

Kuwait's appointed government has hit an impasse in its relations with the elected members of the parliament it shares. Kuwait has had 17 Cabinets (governments) and 8 elections since 2006. There is little reason to believe that, assuming the Emir accepts the Cabinet resignation of 12 December, the next appointed Cabinet will enjoy more support in Parliament and Kuwait will address its festering fiscal and reform challenges. For example, the IMF forecasts a fiscal deficit of over 10% in 2021, the absence of debt law means that the deficit has to be partly financed by dipping into sovereign cash reserves, the public sector and the welfare system is bloated, and Kuwait falls ever further behind its competitors in non-oil diversification in the GCC.

The 15 members of the Cabinet are appointed by the Emir and many of the same faces reappear. On the other hand, the other 50 members of Parliament are elected. Relations continually break down between the appointed (the Cabinet) and elected members of Parliament for many reasons:

  • The culture of vibrant and relatively open political debate.

  • Recurring Cabinet appointments.

  • "Grilling" mechanism in Parliament (a provision for debating a specific Minister's performance and which effectively can amount to a vote of no confidence).

  • Absence of political parties.

  • The prospect facing elected MPs of the next election cycle (sometimes before the scheduled 4-year cycle).

  • Reluctance by MPs to endorse spending plans (which may subsequently be scrutinised on grounds of corruption) or austerity plans (which are naturally unpopular).

It is hard to get excited about Kuwait's investment case

  • Growth is low (the IMF forecasts merely 0.6% growth in 2021 compared to 1.3% to 3.1% in UAE, Qatar, and Saudi);

  • Fiscal deficit is high (11% compared to 5-6% in UAE and Saudi, and a 3% surplus in Qatar), and

  • Trailing PB valuation is on a 7% premium to the 5-year median (lower than the 24% premium in Saudi, similar to that in Qatar, and far higher than the 16% discount in UAE); trailing PB of the Boursa Kuwait All Share is 1.8x, which is high for trailing ROE of merely 8.3%,

Kuwait needs to pass law allowing sovereign bond issuance

Related reading

Oil: The cheapest oil exporter equity markets (Jan 2021)

Kuwait election unlikely to alter populist obstructionism, equities unappealing (Dec 2020)

Saudi and GCC ugly fiscal truth from low oil prices (Oct 2020)

Kuwait's 83-year-old Emir nominates 80-year-old Crown Prince (Oct 2020)

GCC blockade 3 years on: Qatar is best for those who doubt the GCC can diversify (June 2020)

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