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Fitch: Kuwait election a risk to reform; fiscal strength robust
Source: Fitch Ratings , Author: Posted by BI-ME staff
Posted: Sun December 11, 2016 3:15 pm

INTERNATIONAL. --Fitch Ratings-- Kuwait's recent elections will increase tensions between the executive and legislature, hindering economic and fiscal reforms, although the extent to which this will happen is unclear, Fitch Ratings says.

The composition of Kuwait's parliament changed substantially in elections late last month, after most opposition groups revoked their boycott and took part in the poll. The absence of a formal party system makes it hard to quantify the precise size of parliamentary opposition, but it appears that pro-government MPs (including voting ministers) will constitute a tiny majority at best.

The outcome is in line with our view that the elections would deliver a less government-friendly legislature, as we commented when we affirmed Kuwait's 'AA'/Stable sovereign rating earlier in November. We believe mounting parliamentary opposition to the government's fiscal programme was the key trigger for dissolution by the Amir, which precipitated the election.

The nature of the post-election relationship between the executive and legislature remains to be seen. The fragmented nature of the parliament could enable the government to forge political alliances. The prime minister may be able to placate opponents by recommending to the Amir some ministerial candidates from their ranks. But the Amir's re-appointment of the previous prime minister may suggest that the government is preparing to take a more confrontational stance.

Kuwait's parliamentary system creates substantial opportunities for MPs to obstruct the government's agenda by rejecting proposals. The parliament's power to summon ministers for questioning and revoke confidence in ministers gives it influence even on issues that would not formally require a parliamentary vote, such as recent fuel subsidy reforms.

The government may back down from more substantive initiatives such as public sector pay reform, particularly if the oil price recovery is sustained. Nevertheless, it could still pursue some of its fiscal agenda with smaller, less contentious measures, for example enforcing existing subsidy rules or linking public sector bonuses to job attendance.

If parliament were dissolved again, the likely popular frustration about lack of representation and perceived unfair reforms could return Kuwait to the kind of political uncertainty of 2011-2013, when there were three dissolutions of parliament and widespread protests.

Kuwait's exceptional fiscal strengths, which underpin its sovereign rating, would not be immediately affected by a return to this level of political volatility. We forecast the fiscal breakeven price at USD46/bbl in FY16/17, one of the lowest among Fitch-rated oil exporters, taking into account wealth fund investment income in revenue, and excluding statutory transfers to wealth funds from expenditure.

We estimate that the assets of the Kuwait Investment Authority, if the government were prepared to fully use them, could last decades if financing needs stayed at the level we expect for FY16/17.

High execution risk means our fiscal forecasts have not assumed full effect of fiscal measures even where they are already being implemented. One of the most tangible results of the political instability of 2011-2013 was poor execution of infrastructure spending, which if repeated would support fiscal balances, although at the expense of development goals.

But a reversal of economic and institutional reform would reinforce rating weaknesses, which include heavy oil dependence (leading to GDP and budget revenue volatility), weak governance and competitiveness indicators, and a weak economic policy framework compared with rating peers. A generous welfare state and the large economic role of the public sector present long-term structural challenges as the population grows.



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