Political instability is on the rise in one of OPEC's strongest members

OPEC, the thirteen member oil cartel, agreed to curtail output at its meeting in Vienna last week in an attempt to end the global supply glut and hike up oil prices.

Due to the commodity’s depressed prices over the last two years, major producers have been facing growing financial stresses that threaten to morph into political tumult.

Most attention has been centered on Saudi Arabia, and its attempts to pivot away from its oil “addiction.” But another Gulf state has also seen an uptick in domestic political rumblings amid the lower-for-longer environment.

“Kuwait — home to the Gulf Cooperation Council’s most robust representative institutions — is arguably facing the greatest tumult in the face of low prices,” Helima Croft, global head of commodity strategy at RBC Capital Markets, wrote a few weeks back.

Although Kuwait has a small population and a relatively large sovereign wealth fund, its population has not been entirely pleased with austerity measures amid lower oil prices. Thousands of oil workers went on strike back in April to protest proposed government cutbacks. Meanwhile, the government’s August announcement that it will cut fuel subsidies also proved to (unsurprisingly) be unpopular.

Fast forward to October: the Emir dissolved parliament and announced early elections after l
awmakers filed several requests to question ministers over their decision to increase petroleum prices and over “allegations of financial violations
However, when Kuwaitis went to the polls in late November, they voted in opposition candidates into about 20 of the 50 seats, a move that reflected their dissatisfaction with the austerity measures aimed at curbing the budget deficit.

“GCC monarchies survived the Arab Spring uprisings largely unscathed by ratcheting up social spending and the current move to scale back the social contract poses the risk of domestic discord and strife,” wrote Croft ahead of the cartel’s announcement last week. And so, while the GCC producers “remain best placed to endure lower prices for longer, a little extra oil revenue would help keep these governments humming along.”

She added that for that reason it makes sense that Kuwait and the other smaller Gulf producers are willing to coalesce around the Saudis and “help bear the burden of a cut.” And in fact, Kuwait, the United Arab Emirates, and Qatar agreed to cut a combined total of roughly 300,000 barrels per day in Vienna.

Still, looking forward, Kuwait is poised to see tensions between its government and the parliament: the former will likely continue to push forward with austerity measures, while the latter will likely oppose at least some spending cuts.

“As a result, we expect the policy making process to be slow over the coming quarters, with the government pushing through only limited fiscal consolidation reforms, and mostly targeted at the expatriate community,” wrote a BMI Research team.

“Despite some compromise on both sides, the risk of the dialogue between the National Assembly and the government breaking down over the coming quarters will be elevated. If tensions lead to paralysis, we believe that the Emir will not hesitate to dissolve the parliament in 2017,” they added.

If that were to happen, it would be the eighth time in 11 years. And, moreover, Kuwait could possibly again experience the type of political uncertainty last seen in 2011-2013 when people protested after parliament was dissolved several times, according to analysts at Fitch Ratings.

As for what this means on the economic side of things, the Fitch analysts argued in a report that “Kuwait’s exceptional fiscal strengths, which underpin its sovereign rating, would not be immediately affected by a return to this level of political volatility.”

“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,” they added. “A generous welfare state and the large economic role of the public sector present long-term structural challenges as the population grows.”

As an interesting side note, Reuters reported on Monday that Kuwait and Saudi Arabia are expected to resume oil production for their jointly operated oil fields in the Neutral Zone that lies between the two countries — although officials told Bloomberg that they would not increase production above the agreed limits.

In any case, Kuwait will be something to watch going into 2017.

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