Fitch Ratings-Hong Kong/London: Bahrain's USD10 billion support package will help restore external market access while the government works to stabilise its public finances, Fitch Ratings says. The accompanying fiscal programme is Bahrain's clearest medium-term plan in recent years, but achieving the government's fiscal targets will be tough.
The package agreed with Bahrain's Gulf allies last week will take the form of a long-term interest-free loan. The government's new fiscal projections suggest that this will be disbursed gradually until 2022.
The package is large in the context of Bahrain's annual financing needs. Along with compression of bond yields after news of the package first emerged, we expect it to restore Bahrain's external market access. Under our forecasts, Bahrain will need the equivalent of around USD3 billion of new financing every year in 2018-2020 just to cover the budget deficit, with banks in a position to provide some of that. USD7 billion-USD8.5 billion per year will be needed to roll over existing debt, but most of this is domestic short-term instruments held by local banks.
The Fiscal Balance Program (FBP), also published last week, aims to eliminate the fiscal deficit by 2022 and put government debt on a downward trajectory. This is to be achieved mainly through continued reductions in government operational expenditure, a new voluntary retirement scheme for public-sector employees and subsidy reform that appears to go beyond previous policy commitments. The government will also pursue further fee increases and has reiterated its commitment to implement VAT. The lower house of Bahrain's National Assembly approved a draft VAT law on 7 October. The government intends to have all FBP measures approved by end-2018.
The FBP targets are ambitious for Bahrain, in our view. One is to gradually return budgetary spending to around 20% of GDP, from around 27% last year. Budgetary non-interest expenditure has already fallen by 11% since 2014. This may limit the scope for further reductions, even with the GCC loan helping Bahrain rein in a rising interest bill, which has hindered expenditure cuts previously. Further reducing the bill for utility subsidies may be difficult while continuing to subsidise citizens' primary residences. Our updated forecasts, reflecting partial FBP implementation, have budgetary spending at 23% of GDP in 2020. Twenty percent would be far lower than for any GCC peer.
The FBP also aims to double non-oil revenue as a share of budgetary expenditure. Our new forecasts see this ratio rising to about 25% in 2020 from 15% in 2017. We now expect VAT to come into effect in 2020 instead of 2019, given the complexities involved. It could prove politically difficult to combine increased revenue collection from the private sector with prolonged expenditure restraint, even with what we expect will be a more government-friendly parliament after elections on 24 November.
A rebound in oil revenue could significantly reduce the deficit and potentially stabilise debt even if the government only makes partial progress on structural fiscal consolidation. Under our Brent oil price assumption of USD70/bbl, we expect Bahrain's fiscal deficit to narrow to 7.9% of GDP in 2018, from 12.5% of GDP in 2017 (including estimated extra-budgetary spending of over 2% of GDP). If Brent stayed at USD70/bbl, the deficit could narrow to 3.8% of GDP in 2020, 3pp lower than our baseline with Brent at USD57.5/bbl. This would mean only a modest increase in debt from 81% of GDP in 2017.
Bahrain's 'BB-'/Stable sovereign rating already incorporates significant uplift based on our longstanding expectation of support, given Bahrain's small size and strategic importance. We downgraded Bahrain's ratings in March 2018 on the expectation of a continued worsening of debt metrics.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com . All opinions expressed are those of Fitch Ratings.
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