Gulf aid to support Bahrain’s positions

MANAMA: Financial assistance from other GCC sovereigns will support Bahrain’s fiscal and external positions, according to a leading US ratings agency.

In its latest ratings assessment on the kingdom, S&P Ratings has forecast a fiscal deficit of 12 per cent of GDP in 2020 for the country, up from 4.6pc in 2019, largely due to the decline in oil prices.

Oil revenue contributed 72pc of total revenue in 2019 and S&P expects it to remain the largest component of revenue over the next few years.

It is assuming an average Brent oil price of $30 per barrel (/bbl) in 2020, $50/bbl in 2021, and $55/bbl from 2022.

The deficit is expected to average 6.8pc over 2020-2023, an improvement compared with the 12pc average deficit over 2015-2017.

The government has worked to increase non-oil revenue by introducing an excise tax in 2018 and a Value Added Tax (VAT) in 2019, which saw 66pc year-on-year increase in non-oil revenue.

Bahrain’s VAT collections in 2019 were almost 2pc of GDP, on par with collections in the UAE and Saudi Arabia.

Further government initiatives, such as revisions to government fees, should strengthen non-oil revenue in the next few years, said S&P.

Despite the oil price shock, the agency does not believe Bahrain will make large cuts to expenditure, highlighting its low, albeit increasing, flexibility.

While the government is likely to continue implementing reforms under the fiscal balance programme, the low-oil-price environment could delay expenditure-reducing measures.

After a reduction in the public-sector workforce of about 18pc, the government plans to decrease expenditure through a centralised procurement structure, reducing transfers by balancing the Electricity and Water Authority’s budget, and reforming subsidies.

Expenditure fell about 3pc in 2019 compared with 2018.

Government interest payments are increasing, and expected to comprise almost 20pc of total expenditure in 2020, up from about 6.5pc in 2014.

However, interest-free loans from the GCC support package, currently about 10pc of total government debt, should help slow interest-burden growth.

GCC support funds carry a zero interest rate, have a seven-year grace period, and a 30-year term.

S&P expects further support will be provided, if needed, since oil prices remain below the budgeted oil price when the GCC support package was determined.

However, high debt constrains the government’s fiscal flexibility, the agency said.

It estimates that gross debt will increase towards 118pc of GDP by 2023, including GCC support funds.

About 60pc of total debt is external and net debt is expected to average 95pc of GDP over 2020-2023.

The estimate of government assets includes liquid assets of the Social Insurance Organisation and the Future Generations Reserve Fund.

Despite current account deficits since 2015, the economy remains in a net external asset position.

External assets will exceed gross external debt by, on average, 28pc of current account payments over 2020-2023, expects S&P.

Bahrain’s current account deficit is set to widen in 2020 to 10pc of GDP from 2pc in 2019, due to lower oil prices and weaker receipts from tourism and financial services.

Investment income payments and workers’ remittances will remain a drain on the current account balance.

The funding for this sizeable widening of Bahrain’s current account deficit for 2020 will primarily come from debt issuance by the government.

In S&P’s view, monetary policy flexibility is limited because the Bahraini dinar is pegged to the US dollar.

The Central Bank of Bahrain (CBB) has limited ability to maintain this exchange-rate arrangement, since the country’s reserves do not cover the monetary base, it said.

However, support from other GCC sovereigns bolstered the reserve position in 2019 and these deposits are expected to stay, helping improve Bahrain’s external resilience and maintain confidence in the exchange-rate peg.

Bahrain’s gross international reserves increased to about $3.4 billion in February 2020 from about $1.9bn at year-end 2018, largely due to GCC financial support.

This was an improvement over the past few years, when gross international reserves were low and volatile, said the agency.




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