On the political front, the Kuwaiti government will continue to exert strong efforts – and expend considerable resources – to maintain political stability; and the new parliament seems to be more amenable to allowing this than the previous one. With inflation coming down, one source of public unrest has been mitigated, and the government's efforts to maintain living standards will help, but job losses are a risk. Meanwhile Sunni–Shi'a relations will continue to complicate matters both at home and abroad, and the recent re-emergence of the al-Qaeda threat is a reminder of the underlying problems that could resurface should the government lose control.

The new parliament may offer a path of compromise between Kuwait's opposition MPs – many of whom won back their seats – and the reform-minded government. All sides will have to make concessions if they want to avoid taking Kuwait to the polls again – for the fourth time since 2006.

There are 21 new faces in the latest parliament, of which four are female. The Sunni Islamists who had dominated in the past have lost some of their seats, and Shi'a Muslims have increased their presence.

However, most of the ‘rebels’ have been re-elected.

Kuwait risks antagonising its Shi'a population through its policies towards Iraq. The re-election in June of Mahmoud Ahmadinejad in Iran, in spite of widespread protests, will do little to help geopolitical stability.

Kuwait continues to struggle to maintain a balance between foreign and domestic politics, and its policies towards Iraq and Iran highlight tensions between the country's Sunni and Shi'a communities. The Shi'a have not been particularly vocal of late. The major issues are whether the Shi'a are more loyal to their own government or to their coreligionists outside of Kuwait: when Kuwait's policies are perceived to be in opposition to Shi'a interests abroad, this loyalty is tested. How the situation plays out in Iran will be keenly watched in Kuwait.

Kuwait continues to insist that its northern neighbour meet all the compensation requirements for the 1990 invasion, exasperating the Shi'a-led government, which argues that it was nothing to do with – and indeed suffered from – Saddam's foreign policies. The Iraqi government's fiscal position, which is under pressure owing to lower oil prices, could be instantly improved if these payments were to be restructured.

Again, this risks antagonising Kuwait's own Shi'a population, particularly as the government has actively supported and benefited from the highly unpopular US-led war on Iraq. However, there appears to be some progress on the issue of UN-mandated war reparations.

Kuwait is expected to source arms and equipment from abroad into the foreseeable future. It does not have a significant defence industry, and the armed forces rely almost entirely on foreign-sourced arms, equipment and training. Kuwait has sourced large quantities of advanced high-technology weapons systems from major supplier countries, including the US, the UK and France. This is largely a consequence of the Kuwait’s critical geo-strategic position and generally pro-western outlook.

The US military assistance to Kuwait dominates Kuwait’s imports – the vast majority of its arms procurements are from US-based companies. France and Kuwait are in talks over the procurement of military materials and over the development of Kuwait’s nuclear energy sector. Kuwait has been increasing its regional security ties, including with Bahrain.

Defence spending is likely to grow at 5% annually, in real terms, over the next few years. We expect that defence spending will also increase as a proportion of GDP. These increases will depend in large part on how the economy responds in the face of the global financial crisis and the downturn in oil prices.