BizBahrain Magazine (May-June 2019)

Business Report | OBG
save some BD800m ($2.1bn) annually
through a variety of initiatives,
including tightening public
spending, streamlining subsidies and
implementing a voluntary retirement
scheme for state employees.
Following the ratification of the
draft budget, Rasheed Mohammed Al
Maraj, the governor of the central bank,
said significant progress had been
made in curbing the deficit, and that
efforts to address debt and the revenue
gap would continue.
“I think we have come a long way
now with the FBP,” he said. “It has put
out a clear plan to the market about
how we are going to deal with our
budget deficit and public debt.”
The IMF also referenced continued
progress in reducing the deficit in a
report issued on March 5.
The fund said the FBP, underpinned
by the 2019 and 2020 budgets, had
provided a framework to halt the
decline in fiscal and external buffers
that have worsened since 2014.
While the measures under the FBP
are expected to further reduce the
fiscal deficit over the medium term,
the IMF also sounded a note of caution,
warning that already high public debt
levels - which increased from 87% of
GDP in June last year to 93% at year’s
end - are expected to rise further.
As a result, additional reform
efforts, anchored in a more transparent
medium-term agenda, will be needed to
ensure fiscal sustainability, the report
said.
investment-grade, and both Moody’s
and Standard & Poor’s take a similar
position.
The Fitch assessment said that
while increased savings, further gains
from the voluntary retirement scheme
and revenue from the newly introduced
VAT would contribute to narrowing the
deficit, Bahrain’s continued success
will depend in part on a favourable oil
pricing environment moving forward.
How energy prices could affect
recovery
A fall in energy prices or output,
as occurred last year, could renew
pressure on Bahrain’s budget and slow
the progress of the FBP, potentially
pushing back the 2022 target for
delivering a surplus.
By contrast, continued success in
reining in the deficit and sustaining
fiscal reforms should support investor
confidence in the economy.
On February 19 Al Maraj said the
support fund established by Gulf states
last year had led to an improvement in
investor sentiment towards Bahrain,
helping to bring down borrowing costs.
“The FBP has had a tremendous
impact on the level of confidence and
it has sent a very positive signal to
the markets,” he told local media. “Our
bond prices [have] tightened 50 to 60
basis points.”
growth, with allocations set at $1.8bn for
both 2019 and 2020.
The ability to maintain this
spending will be supported by the new
5% value-added tax (VAT), which came
into effect on January 1.
Regional fund and spending cuts
support fiscal outlook
Efforts to close the budgetary gap
have been boosted by neighbours Saudi
Arabia, Kuwait and the UAE, which
in October pledged a $10bn fund to
support Bahraini spending.
In return for the funding, Bahrain
committed to a Fiscal Balance
Programme (FBP), which aims to
Ratings agencies foresee stable outlook
Ratings agency Fitch noted that
much of Bahrain’s progress in scaling
back its deficit was the result of
higher oil prices across the first three
quarters of 2018, which the agency says
accounted for 75% of last year’s budget
deficit reduction.
In a statement issued on February
28, Fitch said the country was making
progress in reforming its economy and
closing the budget deficit, with the gap
forecast to narrow to 6.1% of GDP this
year and 5.3% next.
The agency affirmed Bahrain’s
“BB-” credit rating while maintaining
its outlook as stable. Despite this, the
kingdom’s sovereign rating is below
Oxford Business Group (OBG) is a global
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firm which publishes economic intelligence
on the markets of the Middle
East, Africa, Asia and Latin America. In
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worldwide. OBG has been in Bahrain for
13 years and has recently published The
Report: Bahrain 2019.
For more information, visit www.oxfordbusinessgroup.com
or call us in Bahrain
at 1715 1582.
May-June 2019
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