Strategy Note /
Kuwait

Kuwait politics remains dysfunctional despite passage of budget

  • Budget has finally passed after six months of fractious politics following the December 2020 election

  • This is not a resolution of government and opposition in parliament; opposition still want to "grill" Prime Minister

  • Kuwait is 51bps of MSCI EM and 13% of FM100 (until November); cheaper or more geared plays on high oil price elsewhere

Kuwait politics remains dysfunctional despite passage of budget
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
22 June 2021
Published byTellimer Research

Kuwait’s state budget has been passed in a special session of Parliament, by 32 out of 63 attendees. The government proposed the budget six months ago, during which fractious politics included an appeal by opposition MPs for an audience with the Emir. 

Although the government may use the opportunity of the summer recess to push through much needed fiscal reforms (eg new taxes) via decree, these are likely to be challenged as soon as parliament reconvenes. The opposition still wish to "grill" the Prime Minister and dispute the government's attempt to delay any such scrutiny until the end of 2022.

Well-run, listed companies in Kuwait have had little help from the broader political economy, compared to peers in other wealthy GCC countries. This latest episode of political conflict suggests that this condition is likely to persist.

The Kuwait equity index (KWSE All Share) is up 20% ytd, better than EM (up 5%) or FM100 (up 16%) and roughly in line with the S&P Pan Arab (up 22%). Trailing valuation is well above historic average, and other oil exporter equity markets offer either cheaper (eg Colombia, Qatar, UAE) or more geared economic (eg Nigeria, Oman) plays on a higher oil price.

Kuwait a relatively expensive oil exporter equity market

The latest political flare up  

Pro-government MPs have been attempting to hold special sessions of Parliament solely focused on passing the state budget for the 2021-22 fiscal year. Opposition MPs refused to cooperate because they insisted on ordinary parliamentary sessions where they can question Prime Minister Sheikh Sabah Al-Khaled Al-Sabah (they have submitted a request for this three times this year) and others (eg the Health Minister, Basel Al-Sabah). Pro-government MPs passed a motion in April, in a session boycotted by the opposition, to delay any “grillings” until the end of 2022.

The context for this dispute is as follows.

  • The arithmetic of the current parliament is that 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.

  • The grounds for the opposition is a mixture of a defence of the sovereignty of Parliament, which includes the right to question and hold votes of confidence in members of the Cabinet, to avoid a situation of the use of emergencey decrees during the summer recess once the state budget is passed, and the obstruction of any new taxes (eg VAT or income tax) or cuts to subsidies that might be contained in the budget.

  • 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 equities

The Boursa Kuwait Premier Market index is on forward PB of 2.1x, a 60% premium to the 5-year median, and for merely 8.9% ROE.

However, forward dividend yield of 3.0% does compare favourably, particularly for local investors, with real interest rates of negative 2.2%.

In this context, in our screen of Kuwait stocks, two that stand out are Zain in Telecom and Humansoft in Education, with forecast dividend yields of over 5% and close to 8%, respectively.

An excel version of the stock screen below is available for download via this link.

Download .xlsx

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