Bahrain debt levels need a check
Bahrain has the means, stamina and experience in addressing some of the socioeconomic challenges engulfing the smallest state within the Gulf Cooperation Council. On the economic side, problems include the yawning budgetary deficit, growing public debt, poor credit ratings and the disturbing youth unemployment levels.
With regards to public finance, the budgetary shortage for fiscal years 2017 and 2018 is a matter of concern. The 2017 budget project expenditures of $9.2 billion and revenues of $5.8 billion, for a deficit of $3.4 billion and around 11 per cent of GDP. Bahrain’s gross domestic product is at around $32 billion.
Yet, the data for fiscal year 2018 suggest expenditures of $9.2 billion and revenues of $6.2 billion, with the projected deficit at $3 billion. The higher revenues in 2018 partly reflect the possible implementation of value-added tax. Nevertheless, unlike the UAE and Saudi Arabia, the authorities in Bahrain have yet to confirm a VAT roll-out in 2018.
On a positive note, the budget for both fiscal years assumes an average oil price of $55 per barrel, largely in line with prices in the market. The petroleum sector contributes about three quarters of treasury revenues and about the same for exports.
However, talk about economic diversification in Bahrain relates to the relatively low contribution of the petroleum sector in the GDP. The financial services sector is a key source, and becoming more so following the collapse of oil prices.
Turning to the debt debacle, the amount stood at $24 billion during the first half of 2017, or three quarters of GDP. What’s more, the government has secured legislative backing to increase the ceiling of the public debt to $34 billion or more than the country’s nominal GDP at the moment.
Moreover, credit rating agencies like to see serious efforts to stamp out the fiscal problem. In late July, Moody’s downgraded Bahrain’s longterm rating from Ba2 to B1 and maintained the negative outlook. Moody’s is displeased with the absence of a comprehensive fiscal reforms strategy. Worryingly, Moody’s sees possible deterioration in the debt burden and affordability in the coming two to three years.
Disturbingly, debt servicing is rising steadily, amounting to $958 million in 2016 but projected to increase to $1.26 billion in 2017 and $1.41 billion in 2018. This is potentially related to more debt plus the higher financing cost due to Bahrain’s risk level.
In June, Standard and Poor’s changed Bahrain’s sovereign credit rating from stable to negative while maintaining the rating of BB-. Notably, S&P is annoyed with deterioration on the net external asset position.
The rating level impacts the securities issued by Bahrain that are now considered below investment grade level, thus adding to cost of borrowing. Furthermore, labour officials must attend the joblessness. A study by the World Economic Forum puts the unemployment rate around 8 per cent. But the jobless rate rises to more than double this among the youth.
Bahrain has a track record in overcoming tough economic problems. Yet, this time around, the challenges are exceptionally troublesome with no end in sight for a correction of oil prices.