Bahrain's Balanced Budget Delay Unlikely to Deter Debt Investors
2021-09-30 - 4:02 am
Bahrain Mirror- Reuters: Bahrain's delaying of its fiscal balance program, which pushes a zero-deficit target by two years to 2024, is unlikely to deter investors from buying its debt, amid expectations of continued support from richer Gulf allies.
The heavily indebted Gulf state said on Sunday that data from February 2020, before the impact of the COVID-19 pandemic, showed Bahrain had exceeded targets set in a medium-term fiscal plan aimed at balancing the budget by 2022.
Due to the coronavirus crisis last year, however, it postponed the target year for a balanced budget to 2024, and announced plans to hike a value-added tax to boost state coffers.
"A VAT hike... would help fiscal revenue structurally, and therefore should improve creditworthiness. Ultimately, though, it is the implicit support from Saudi that matters most for Bahrain," said Hasnain Malik, head of equity and strategy at Tellimer.
Gulf allies Saudi Arabia, Kuwait and the United Arab Emirates, extended a $10 billion aid package to Bahrain in 2018 to help it avoid a credit crunch.
Bahrain's public debt climbed to 133% of GDP last year from 102% in 2019, according to the IMF.
The spread on Bahrain's five-year credit default swaps - a measure of risk of a debt default - was at 287 on Tuesday, according to IHS Markit, unchanged from Monday and up only slightly from 273 last week.
"Investors will likely continue to hunt for yield via Bahrain's debt, comforted by the implicit support from Saudi Arabia and other Gulf allies," a fixed income strategist in the region said.
Bahrain's finance ministry did not respond to requests for comment on the new fiscal plans.
"The key thing now is to have a credible and robust set of policies to achieving the fiscal balance programme target and if the government has that, then the markets will be forgiving of some slippage", said Scott Livermore, chief economist at Oxford Economics Middle East.
For ratings agency S&P Global Ratings, the new target remains ambitious and the pace of fiscal reforms insufficient to stabilise the country's debt levels.
"We have not forecasted a balanced budget for Bahrain even out to 2024, as we believe the delicate political and social environment on the island constrains the government's fiscal reform efforts," S&P analyst Max McGraw said.
Bahrain has in the past backtracked on some reforms as its Sunni Muslim rulers feared that austerity moves would bolster the majority Shi'ite-led opposition and stir more of the unrest that rattled the country since the 2011 Arab Spring uprisings.
S&P forecasts Bahrain's deficit, which was 16.8% of GDP last year, to average 5% between 2021 and 2024, excluding the impact of a possible hike in value-added tax.
"Although there could be a slight drag on growth, increasing the VAT rate would help improve Bahrain's fiscal position by increasing non-oil revenues," McGraw said.
VAT contributed about 1.8% of GDP in 2019 and 2020 and doubling it could raise that to more than 3% of GDP, he added.
Ratings agency Fitch said Bahrain would likely require further financial support from Gulf allies in the coming years, as external liquidity remains very tight.
"We believe that progress with other fiscal measures would be necessary, in addition to the VAT increase, to bring the budget deficit to balance, based on our current oil price assumptions", it said.