Bahrain’s $10 billion support package will help restore external market access while the government works to stabilise its public finances, according to Fitch Ratings.
The ratings agency said in a research note that achieving the government’s fiscal targets will still be tough.
The package agreed with Bahrain’s Gulf allies recently 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.
Fitch said the package is large in the context of Bahrain’s annual financing needs, adding that Bahrain will need the equivalent of around $3 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.
Between $7 billion-8.5 billion per year will be needed to roll over existing debt, but most of this is domestic short-term instruments held by local banks, Fitch added.
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 said it will also pursue further fee increases and has reiterated its commitment to implement VAT.
The FBP targets are ambitious for Bahrain, in Fitch’s view. One is to gradually return budgetary spending to around 20 percent of GDP, from around 27 percent last year.
“Our updated forecasts, reflecting partial FBP implementation, have budgetary spending at 23 percent of GDP in 2020. Twenty percent would be far lower than for any GCC peer,” Fitch said
The FBP also aims to double non-oil revenue as a share of budgetary expenditure.
Fitch added: “Our new forecasts see this ratio rising to about 25 percent in 2020 from 15 percent 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.”
Fitch noted that 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.
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