Strategy Note /
Kuwait

Kuwait government resigns, political reconciliation unlikely

  • Third cabinet (government) resignation in the last year follows Emir's pardon of members of the political opposition

  • More likely a sign of continuing political dysfunction than a reconciliation of obstructionism going back over a decade

  • Kuwait a relatively more expensive play versus history on high oil price than other exporters, including most of GCC

Kuwait government resigns, political reconciliation unlikely
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
9 November 2021
Published by

The Kuwait cabinet resigned, on 8 November, following Emir Nawaf's pardon of members of the political opposition.

Some may view this as a step towards reconciliation of a conflict, ongoing for over a decade, between members of the cabinet – who are often re-appointed by the Emir – and a diverse group of politicians who do not belong to specific parties (which are banned) but, to varying degrees, campaign for political reform, stand for election to parliament, habitually oppose the cabinet in parliament, and lead protests.

However, a less sanguine interpretation is merited. Should the Emir accept the resignation, this will be the seventeenth cabinet since 2006 and the third resignation in the last year alone. The structural reason has not changed: the parliament is elected but the government (cabinet) is appointed. In the absence of many new faces in senior cabinet positions, it is not clear why the impasse between these two groups should change.

In the short term, political dysfunction is likely to prevent legislation needed to raise sovereign debt on a scale needed over the next decade. In the long term, it likely remains the case that when oil revenues are high, Kuwait struggles to spend on efficiently implemented projects and when oil revenues are low it struggles to impose austerity and pursue structural reform.

Kuwait equities (KWSE All Share) are up 33% ytd, better than EM (flat), a little ahead of FM (up 29%) and a little behind the S&P Pan Arab (up 37%). Trailing valuation is well above the historic average (eg PB is on a 50% premium to the 5-year average). Other oil exporter equity markets, including most of those in the GCC, offer cheaper exposure to high oil prices. Kuwait is about 60bps of the MSCI EM index.

Kuwait is a relatively expensive oil exporter equity market

The context for Kuwait's political dysfunction

  • The current parliament, elected in December 2020, is made up as follows: the opposition bloc numbers 31 MPs, the government bloc numbers 32 (a combination of 16 Cabinet members and 16 MPs), and there are 3 undecided MPs. Quorum requires 33 (out of a maximum of 66) attendees.

  • Rule by Emiri decree is possible during parliamentary summer recesses or in times of emergency but not as a normal course, unlike in other GCC countries.

  • Kuwait is extremely wealthy by global standards (FX reserves and sovereign wealth equate to about US$450k per citizen) but the non-oil economy has consistently failed to meet its potential. Political dysfunction between the elected MPs and appointed Cabinet members inhibits the implementation of either ambitious development in times of high oil prices or austerity in times of low oil prices, and means both the unsustainable high expectations of welfare provision by the state for citizens (30% of the population) and the unsustainable reliance on expatriate labour are not addressed.

  • Relations continually break down between the appointed (the Cabinet) and elected members of parliament for many reasons:

    1. The culture of vibrant and relatively open political debate.

    2. Recurring Cabinet appointments.

    3. The "grilling" mechanism in parliament (a provision for debating a specific Ministers' performance and which effectively can amount to a vote of no confidence).

    4. Absence of political parties.

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

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

Kuwait fiscal balance far below that seen at last oil price peak and political paralysis of reform is a major cause

Kuwait needs, at a minimum, a sovereign debt law

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