COVID-19 economic recovery issues are likely to be the main policy priority under Kuwaiti Emir Nawaf al-Ahmad Al-Sabah. There will also be additional pressure on the new emir's government to effectively pass a debt law, which would allow the state to access international capital markets without being blocked by parliament. The succession of power to Nawaf al-Ahmed Al-Sabah, as the Kuwaiti National Assembly concludes its session at the end of September 2020, increases the likelihood that a new debt law will be passed by emergency decree before parliamentary elections scheduled for November.

The global oil price collapse and COVID-19 pandemic are dual shocks affecting Kuwait's economy, with IHS Markit projecting Kuwaiti real GDP to contract 9.8% in 2020. Kuwait recorded a USD46-billion budget deficit for the 2020/21 financial year, representing a 52% increase over the government's initial projected deficit before the ancillary effects of the COVID-19 pandemic and the collapse in global oil prices were accounted for. In 2020, IHS Markit expects the deficit to widen to 18.6% of GDP as fiscal revenue declines by 37% from the previous year, or by 9 percentage points of GDP to 33% of GDP.

Following succession, the risk of contractual and foreign policy disputes will increase. The late emir had played a central role in attempting to mediate disputes between Gulf Cooperation Council member states. Now, the leadership in Saudi Arabia and the UAE is likely to increase pressure on the new emir to shift away from Kuwait's more conciliatory approach. Saudi Arabia will likely prioritize having Kuwait withdraw from a bilateral defense plan signed with Turkey in 2018, seek additional Kuwaiti condemnation of Qatar, and renew outreach to Israel - both of which would likely be opposed under Nawaf al-Ahmad Al-Sabah's rule. Despite restarted oil production with Saudi Arabia in the Partitioned Neutral Zone (PNZ) in 2020, and although Kuwaiti oil is likely to remain offered to Asian markets at a discount wider than Saudi Arabia is willing to offer, the scale of Kuwait's financial difficulties mean that this is unlikely to escalate into more intense pricing competition.

The risk of increased policy divergence with Saudi Arabia would probably be reduced if, as is likely, Nasser Sabah Al-Ahmad Al Sabah is appointed as the next crown prince. Nasser Sabah Al-Ahmad is known to have a closer working relationship with Saudi officials and has openly endorsed attracting more foreign direct investment and restructuring the Kuwaiti economy away from oil reliance as part of the Vision 2035 plan. Crude oil constitutes 90% of Kuwait's fiscal revenue and exports, and around half of total GDP.

The next choice of crown prince is likely to determine the ruling family' stability and policy direction. Upon accession, the new emir will have no more than a year to choose an heir and this must be approved by parliament. It is very likely that Nawaf al-Ahmad Al-Sabah will appoint Nasser Sabah Al-Ahmad Al Sabah as crown prince, which would continue the current pattern of the Al Jaber branch of the Al Sabah family that was established under the late emir. This choice would indicate the continuation of the Vision 2035 economic development plan and the Silk City development to the north of Kuwait City.

Posted 01 October 2020 by Jack A. Kennedy, Associate Director and Head of Desk, Country Risk – Middle East and North Africa, S&P Global Market Intelligence