Gulf neighbours give Bahrain’s economy a game-changing lift with aid package
▶ Analysts say relief will be short-term as fiscal cuts keep economic expansion in check this year and next
Arabian Gulf nations gave Bahrain a lifeline with a $10 billion aid package that will help to stabilise the economy in the short term – but it must meet fiscal reform targets to restore investor confidence over the long run, analysts say.
The assistance will help Bahrain to repay immediate debts, replenish foreign currency reserves, borrow at cheaper rates on international debt markets and prevent a currency devaluation that could spill over to neighbouring countries.
Its focus now must be on implementing austerity measures and moving away from a reliance on oil revenues.
“The $10bn conditional support could be the game changer for Bahrain’s economy that markets and credit rating agencies have been waiting for,” said Ehsan Khoman, head of Mena research and strategy at MUFG Bank.
Saudi Arabia, the UAE and Kuwait said on October 4 that they had agreed to support Bahrain’s financing needs and stimulate economic growth in a five-year aid programme.
Bahrain issued a 33-page financial programme that was aimed at eliminating its budget deficit by the year 2022.
It would reduce its public spending in a programme overseen by six task forces, introduce a voluntary retirement scheme for government employees, improve efficiency in state expenditure and streamline cash subsidies to citizens.
The plan is the most comprehensive course of action detailed by Bahrain since oil prices plunged in 2014, leaving the Gulf nation grappling with ballooning public debt.
Bahrain also last week introduced a bankruptcy law aimed at luring foreign investors and supporting the growth of small businesses in the kingdom.
Manama is also introducing a personal protection law to govern data processing for commercial use, a competition law to prevent the formation of monopolies, and new health insurance legislation.
“The reforms demonstrate that Bahrain continues to create a regulatory environment that is in line with international standards and best practices, said Rad El Treki of law firm Al Tamimi and Company.
“The intention is to remove stigmas and deterrents and provide more reassurance to investors.”
Arabian Gulf allies have provided Bahrain a “lifeline” to stabilise its economy and prevent a potential credit crunch with a $10 billion aid package.
However, the country needs to deliver on fiscal reform target to ensure that sustainable progress is made, analysts said.
The assistance will provide short-term relief to the smallest Gulf economy, help to avoid a currency devaluation, meet immediate debt payments, dispel speculation on the currency peg to the US dollar and allow it to borrow on international debt markets at cheaper interest rates, they said.
The support will allow Bahrain to focus on measures to rein in its budget deficit.
“This is an important lifeline for the Bahraini economy and should allow policymakers time to continue the implementation of the reforms necessary to restructure the economy,” said Tarek Fadlallah, chief executive of Nomura Asset Management Middle East.
“In the short term it will restore confidence but Bahrain will still have to successfully implement additional reform measures to convince longterm investors.”
Saudi Arabia, the UAE and Kuwait said on Thursday that they had agreed to support Bahrain’s financing plan and stimulate economic growth over the course of a five-year aid programme.
Bahrain issued a 33-page financial programme aimed at eliminating its budget deficit by 2022 and reducing public spending overseen by six task forces.
It is also introducing a voluntary retirement scheme for government employees, improving efficiency in state expenditure and streamlining cash subsidies to its citizens.
“The conditional support could be the game changer for Bahrain’s economy that markets and credit rating agencies have been waiting for,” said Ehsan Khoman, head of Mena research and strategy at MUFG Bank.
“The conditionality of the support package will provide much-needed relief for markets given that investors will take more comfort in the forward-guidance structure of reform execution.”
Assistance by the Gulf countries will help avoid a currency devaluation that market-watchers fear could spill over to neighbouring oil-producing countries.
“It is in the interest of all GCC countries that the pressure on the Bahraini currency subside and that the peg to the dollar is maintained to avoid contagion or spillover effect,” said Garbis Iradian, Mena chief economist at Institute of International Finance.
The aid package will be a “vitamin supplement” to help revive the economy’s health and is “the right start” in the road to recovery, said Mazen Al Sudairi, head of research at Al Rajhi Capital.
However, the fiscal reforms required to rein in Bahrain’s large fiscal and current account deficits could lead to weaker economic growth in the shortterm, economists said.
MUFG Bank expects Bahrain’s gross domestic product growth to decline to 1.5 to 2 per cent in 2018 and 2019 from 3.9 per cent last year.
“This is just the beginning of a tough journey,” Mohamed Abdelmeguid, Mena analyst at Economist Intelligence Unit, said. “Growth in Bahrain is driven in large part by government spending, and any deep fiscal cuts will keep economic expansion in check at least initially.”
The aid programme will only meet half of Bahrain’s financing needs over the next years, with the rest financed predominantly through debt issuance.
Analysts warned against a slowdown in the pace of Bahrain’s economic reform programme as oil prices rebound and Gulf financial aid pours in.
“Bahrain should not be complacent,” said Rami Sidani, head of frontier investment markets at asset management company Schroders.
“They need to implement austerity measures and meet fiscal reform targets otherwise the situation is not sustainable.”
Investor confidence in Bahrain is likely to be a tale of two stories, where on one hand markets will welcome the aid package and confidence will be restored to the banks, Mr Abdelmeguid said.
On the other hand, foreign investors will play “wait and see” until they are assured of the government’s commitment to policy reforms, which will take time.
Long-term sustainable recovery means that Bahraini authorities will need to reduce fuel subsidies, contain the public wage bill, rein in public spending, and introduce a 5 per cent VAT next year, said Mr Iradian.
“The focus of attention will now be on reform execution in line with the ‘fiscal balance programme’ to ensure that Bahrain’s operating model shifts to a more sustainable footing away from the reliance on hydrocarbons,” said Mr Khoman.