Bahrain has been one of the GCC member states most negatively impacted by the fall in the oil price since mid-2014: not only does it have one of the highest fiscal breakeven prices but it has weaker financial buffers to cushion the impact. Fiscal adjustments were insufficient to offset lower oil prices so Bahrain ran double digit fiscal deficits eating into its asset buffers and pushing up government debt levels to 89.2% for 2017 (Moody’s estimate including debt held by the central bank) from 44.4% in 2014. This year Bahrain abandoned a planned bond issue (in March) and Central Bank Reserves fell below USD 2bn, less than one month of import cover. Fortunately, Bahrain’s GCC allies (Saudi Arabia, Kuwait, and the UAE) stepped in with a USD 10bn support package earlier this month augmenting a development assistance program from 2011.
Clearly, the fiscal situation needed to be addressed and put on a more sustainable path, so under an accompanying fiscal balance program (FBP) Bahrain aims to reduce its large fiscal deficit to zero by 2022 and reduce public debt to 82% of GDP (ex debt held by the central bank) by 2022. Measures to bring down the deficit include: targeting a reduction in government spending from 26.6% of GDP to 19.5% of GDP and boosting non-oil revenues by 2-2.5% of GDP. Targeted expenditure reductions include general operating expenditure reductions, a voluntary early retirement scheme for government employees, subsidy reduction and tariffs adjustment to balance the Electricity and Water authority budget by 2022, and the introduction of a 5% VAT tax. The key will be the extent to which Bahrain delivers on these planned fiscal reforms and the oil price versus projections.
Nevertheless, these measures are positive for confidence and provide funding to alleviate Bahrain’s immediate external liquidity pressures and should enable it to access financial markets again. Bahrain has significant amounts of debt that it will need to refinance over the next year or so but Moody’s argue ‘The promised $10 billion of GCC funding would cover most of the government’s 2019-2022 external debt service, which we estimate at $11.4 billion (or $12.1 billion if the forthcoming November sukuk repayment is included)’. That said, the Kingdom of Bahrain does not screen attractively on our models at current levels: for example using a BB- best rating the 6% Kingdom of Bahrain 2044 bond trades close to fair value.