Strategy Note /

Kuwait's new government faces old problems

  • Politics still appears dysfunctional despite relatively new crown prince (de facto emir), prime minister and parliament

  • The opposition has 56% of seats and 76% of MPs have reportedly objected to the appointed PM's appointed cabinet

  • It looks as if Kuwait likely remains a play on oil alone, rather than another a competitor in the GCC race to diversify

Kuwait's new government faces old problems
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
6 October 2022
Published byTellimer Research

To view Kuwait as a catch-up candidate on non-oil development, in an increasingly competitive GCC landscape, evidence of collaborative relations between the cabinet and parliament is needed. Without this, it remains a play largely on the oil price alone.

The signs so far from the prime minister and cabinet (appointed on 5 October) and parliament (elected on 29 September) are discouraging.

  • A fragmented and highly individualistic opposition won 56% of elected seats, up from 48% in 2020 and 40% in 2016.

  • Prime Minister Ahmed Nawaf Al-Ahmed Al-Sabah is relatively new – first appointed on 24 July, and re-appointed, after the most recent election, on 5 October. But 40% of the ministers in his cabinet were part of the cabinet of the previous prime minister, whose fractious relations with parliament led to his resignation and the call for early elections by the Crown Prince earlier this year.

  • The only elected MP to be included in the cabinet (legally, at least one MP must be included among the appointees) resigned immediately.

  • 76% of MPs, according to @KuwaitNews, have objected to the new cabinet.

Kuwait has 7% of global oil reserves and makes up c85bps of the MSCI EM equity index.

Entrenched political dysfunction

Two contentious personalities for the parliamentary opposition have exited the political scene in recent months. Without these two focal points for their ire, there was hope that this would soften the opposition.

  • Sabah Al-Khalid al-Sabah (age 69) – former prime minister, heading four cabinets between November 2019 and July 2022, acting as a caretaker between his resignation, before an imminent vote of no confidence, on 5 April and July 2022, and former deputy prime minister between December 2011 and November 2019; and

  • Marzouq Al-Ghanem (age 53) – long-time speaker of parliament (August 2013 to August 2022), who did not stand for election this time round.

Below, we consider Kuwait's political system and the structural reasons why relations between the appointed cabinet and elected parliament have been so fractious historically.

  • The Emir is from the Al-Sabah ruling family and has the power to:

    • Appoint the prime minister, who in turn appoints the cabinet;

    • Appoint the judiciary;

    • Veto laws passed by parliament;

    • Dissolve parliament; and

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

  • Al-Sabah ruling family is split between two branches – Al-Jaber and Al-Salem. Historically, the positions of the Emir and Crown Prince have alternated between the two but this appears to have stopped in 2006, and rivalry between these two branches can affect relations between the prime minister and cabinet appointees of the Emir and elected MPs:

    • Former Emir Sabah Al-Ahmad Al-Jaber Al-Sabah (who ruled from 2006 to September 2020) appointed a fellow member of his branch, Nawaf Al-Ahmad Al-Jaber Al-Sabah (who is now the current Emir, albeit his activity is hindered by persistent ill health); and

    • Current Emir Nawaf Al-Ahmad Al-Jaber Al-Sabah (age 85) appointed Mishal Al-Ahmad Al-Jaber Al-Sabah (age 82) as Crown Prince in October 2020 (and conferred constitutional Emiri powers to him in November 2021).

  • The elected parliament has its origins in the checks and balances historically applied on the Emir by the old merchant class (the private business community, which focused on the non-oil sectors, as opposed to the Al-Sabah ruling family, which focused on the oil sector and the redistribution of wealth from it). The parliament, excluding the appointed cabinet, is made up of 50 MPs, who are popularly elected for four-year terms.

    • The 'grilling' mechanism in parliament allows for debating a specific cabinet minister's performance and effectively can amount to a vote of no confidence and the removal, or pre-emptive resignation, of a cabinet minister.

    • Parliament can overrule an Emiri veto with a two-thirds vote.

    • Parliament must approve the appointment of a new Crown Prince with a majority vote.

  • Cabinet-parliament relations break down for many reasons:

    • The culture of vibrant and relatively open political debate.

    • The recurring prime minister and cabinet appointments – between the formal separation of the positions of Crown Prince and prime minister in 2006 and July 2022, Kuwait has had merely three prime ministers, each presiding over multiple cabinets and, in the first two cases, multiple elected parliaments.

    • The absence of political parties (which inhibits a consensus behind a coordinated legislative agenda, encouraging, instead, the promotion of interests specific to individual constituencies).

    • The prospect facing elected MPs of the next election cycle (often before the scheduled four-year cycle) incentivises short-termism (focus on welfare or political point scoring under the guise of anti-corruption) over long-termism (eg structural reform of state enterprises and public sector labour, and the implementation of multi-year infrastructure, industrial and real estate projects).

      • In recent elections, newly elected MPs have numbered 54% (2022), 62% (2020), 60% (2016) and 50% (2012, despite an election boycott by the opposition).

      • Four out of the past six elections have been called before the completion of the four-year cycle – June 2006, May 2008, December 2020 and September 2022.

  • Kuwait's extreme wealth by global standards (FX reserves and sovereign wealth equate to cUS$450,000 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.

New government's tasks

The first priority of the new government needs to pass a new budget, with Kuwait still operating on last year's one – the new 2022-23 fiscal year started in April and the unpassed draft budget calls for flat fiscal spend versus the prior year.

The critical medium-term question, against a long history of fractious relations between appointed cabinets and elected MPs, is whether it will be able to achieve more than this, for example:

  • The Public Debt law, which enables issuance of sovereign debt to finance future government spending, as opposed to drawing down sovereign wealth;

  • The completion of long-delayed construction projects;

  • Structural reform, eg introduction of VAT, a mortgage law to spark bank lending, wider home ownership and real estate development;

  • The leveling of incentives for citizens seeking employment in the public and private sectors, including reducing dependency on welfare and expatriate labour;

  • Creating guarantees for foreign investors and contractors in large development projects, which protects them from retrospective contract disruption and re-negotiation; and

  • Greater legal protection for women's rights.

An oil play alone, if no change

If there is no change, then Kuwait will remain simply a play on oil prices:

  • Net fuel exports average c82% of GDP (assuming Brent is US$100), compared with a range of 46% (Saudi Arabia) to 72% (Qatar) for the main GCC fuel exporters;

  • The fiscal breakeven for 2023, on IMF estimates, is US$53 (prior to the 10% revenue transfer to the Future Generations Fund), compared with a range of US$59 (Qatar) to US$69 (Saudi Arabia) for the main GCC fuel exporters.

Kuwait has lowest fiscal breakeven oil price in GCC

Kuwait more exposed to oil trade than GCC peers

Equities buoyed by oil prices, similar to GCC peers

Pessimism on these medium-term challenges is so entrenched that any positive progress could spark a positive reaction in the price of Kuwait assets.

The local equity index is up 6% year to date, compared with a range of up 6% (Saudi Arabia) and up 19% (Abu Dhabi) among the main GCC oil exporter peers (Abu Dhabi, Oman, Qatar, Saudi Arabia).

Equities are valued, on trailing price/book, at around a 15% premium to the five-year median, compared with a range of 15% (Oman) and 100% (Abu Dhabi).

Kuwait equities at a c15% premium to historic average PB

Kuwait cheaper than most GGC oil exporter peers