Bahrain’s average real GDP growth over 2019-2022 is expected to be 2.4 per cent, said S&P Global Ratings in a new report.
“We expect the government's plans to promote infrastructure development, including several large projects like the refinery modernization programme, to support growth. Funding will come from the private sector ($15 billion), government-owned companies ($10 billion) and GCC funds for infrastructure investment ($7.5 billion),” said S&P.
As of year-end 2018, about $2.5 billion (6 per cent of 2018 GDP) of the $7.5 billion GCC infrastructure support fund had been disbursed. “We expect about $870 million will be disbursed over 2019, and further annual disbursements of about the same over the next three years,” S&P said.
Population growth was flat in 2018 due to a government exercise to clear old and inactive employment visas from population statistics. Nevertheless, when GDP performance during 2013-2022 is adjusted for population levels, real growth is negative, suggesting that labour supply, rather than capital investment or innovation, is a key growth driver.
Flexibility and performance profile: Financial support from other GCC sovereigns will help Bahrain implement budgetary consolidation
The government is implementing an ambitious plan to balance its budget by 2022. The plan includes measures focusing on increasing revenue capture from the non-oil sector of the economy. The plan depends heavily on expenditure reduction efforts, including cuts in the public sector workforce and fewer transfers to the Electricity and Water Authority, the report said.
“Taking into account the government's new plan, we now expect Bahrain's fiscal imbalance will narrow at a faster pace, reaching 4.6 per cent of GDP by 2022 from close to 10 per cent of GDP in 2017. We expect increases in non-oil revenues, especially from the introduction of VAT in 2019. Though implementation will be gradual, we assume on average that VAT introduction could have a revenue-raising effect equal to about 1 per cent of GDP a year.
“Currently, fiscal revenues are heavily oil-dependent, despite the oil sector contributing less than 20 per cent to GDP. We believe that government revenues will remain dependent on oil over the forecast period. For our base case, we assume an oil price of $60 per barrel in 2019 and 2020 and $55 thereafter (see related research). We expect expenditures will continue to decline over our forecast period. The government began reducing the public sector workforce in 2019, with the majority of voluntary retirements taking place in January and February.
“We estimate that the initial outlay required to fund this scheme at about 2 per cent of 2019 GDP. We expect that the cost of the scheme will not be funded from the state budget, and assume it will be paid for with government assets. The government also plans to decrease expenditure through a centralized procurement structure, and to balance the revenues and expenditures of the Electricity and Water Authority, which would reduce government transfers.
“The plan also includes the reform of subsidy programs. Currently, multiple entities grant subsidies, and the government intends to consolidate disbursement and more strictly monitor eligibility of recipients. Government interest payments are an increasing expenditure item, now comprising almost 17 per cent of total expenditures, up from about 6.5 per cent in 2014. Though the financial support package, concessional in nature, should help control the growth of interest costs, we believe it will remain a large component of expenditure.
“Disbursements for the support package from Kuwait, Saudi Arabia, and the United Arab Emirates, announced in October 2018, began in 2018. We expect disbursements will continue over the length of the government's 2019-2022 budgetary consolidation program. The support package consists of concessional debt, the disbursement of which we do not believe are tied to strict conditions. The support funds are on top of the $7.5 billion announced in 2011 for infrastructure investment.
“In our view, a high level of debt constrains the government's fiscal flexibility. We estimate that the gross debt stock will increase toward 96 per cent of GDP by 2022, which includes the $10 billion in fiscal support from other GCC sovereigns. Our forecasts include an additional 1 per cent of GDP over the budget deficit in annual government debt accumulation, in relation to the government's historical off-budget spending on defence and the Royal Court. We estimate debt on a net basis will average 74 per cent of GDP over 2019-2022.
“In our view, monetary policy flexibility is limited because the Bahraini dinar is pegged to the U.S. dollar. In addition, we consider the Central Bank of Bahrain (CBB) has limited credibility regarding its ability to maintain its exchange rate arrangements, given its low and volatile level of gross international reserves.
“Bahrain's gross international reserves are low, covering less than one month's current account payments and about 40 per cent of the monetary base, according to our estimates. Gross international reserves were about $2.6 billion as of April 2019. We estimate reserve levels at $2 billion at the end of 2019. They have been volatile, in the absence of a substantial and sustained net inflow of foreign currency. Nevertheless, GCC financial support should support reserves, while the CBB receives daily foreign currency inflows from the sale of oil (through the national oil companies).
“We forecast year-end reserves will be broadly flat over the next few years. We expect a modest narrowing in Bahrain's current account deficit this year compared with a deficit of 5.9 per cent in 2018, which was partially caused by increased outward remittances. However, we assume a decline in oil prices over the forecast period, which should keep current account deficits at about 4 per cent on average over 2019-2022. Increased exports of aluminium from the expansion of Aluminium Bahrain should support exports.
“Although we expect Bahrain will remain in a net external creditor position over the forecast period, we expect that the coverage of external liabilities by liquid external assets (narrow net external debt) will fall slightly. Gross external financing needs remain high due to Bahrain's large banking sector.
“For our banking sector contingent liability assessment, we refer only to the resident retail banks because, in our view, the cost of the wholesale banks' potential financial distress would not be fully borne by the government, given the high share of foreign ownership. This is not the case, however, in our external risk analysis, where the international investment position contains both resident retail and resident wholesale banks.
“Despite Bahrain's large financial sector (domestic retail banks) with gross assets estimated at about 235 per cent of GDP and a large number of companies majority-owned by the government, we consider the government's contingent liabilities to be limited. Our Banking Industry Country Risk Assessment for Bahrain is '7' (on a scale of 1-10, with '1' being the lowest risk and '10' the highest),” S&P said in the report.
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