Bahrain strives for higher economic growth
Manama - The 2011 protests stirred by the “Arab spring” continue to affect Bahrain’s economy. Although many of the kingdom’s majority Shia community still feel marginalised, much of the violence and instability of the past four years has come to a slow halt.
However, the struggling and oil-dependent economy suffered an additional blow in mid-2014 with the dramatic fall in hydrocarbon prices. This triggered new economic challenges that the government is adamant on tackling head-on.
The Bahraini government said it aims to push the private sector to drive much-needed growth but the country’s economy remains extremely dependent on support from Gulf Cooperation Council (GCC) funds, particularly from Saudi Arabia and the United Arab Emirates.
The main challenge facing Bahrain is the ability to curb public spending while raising revenues to prevent the deficit swelling out of control. To achieve this, the 2015- 16 budget outlines $2 billion for subsidies in 2015 and $1.7 billion in 2016, a significant reduction from $2.5 billion in 2014. Bahrain’s budget also reflects a 61% year-on-year increase in budgeted debt in 2015 despite reduced capital spending.
In 2013, oil and gas sales accounted for more than 88% of government revenues. At the end of the third quarter of 2014, Bahrain’s debt stood at 43.4% of gross domestic product (GDP), compared with 25.2% in 2010.
Total revenues are expected to reach $5.3 billion, 25% lower than 2014 and the lowest projected since 2010. Total budgeted expenditures are expected to reach $9 billion, which is 3.5% less than the previous year. The government’s budgeted spending for capital expenditure, which is based on an oil price of $60 per barrel, is 21% lower than in 2014.
Consequently, it came as no surprise when US rating agency Standard & Poor’s (S&P) downgraded the country’s sovereign wealth fund, Mumtalakat, rating to BBB-/A-3 from BBB/A-2. Mumtalakat was placed on negative outlook in December 2014 by S&P, reflecting the reliance the fund has on the government when financial support is needed.
However, the spin from Bahrain has been positive. Analysts and government official said fiscal and macro-economic policies moving forward will push the private sector to contribute to diversification of the economy and stimulate growth.
“The expectation is that public spending will have to be limited in 2015,” Reda Faraj, a Bahraini member of parliament and Shura Council member, said. “The island nation needs hospitality, manufacturing and construction projects to accelerate in order to drive economic growth to compensate for a slowdown in hydrocarbons GDP expansion.”
Although a report published by Bahrain’s Economic Development Board (EDB) in March said there are $22 billion worth of infrastructure schemes in the pipeline, Faraj says the government cannot afford to launch new projects in 2015.
Following the partnership between the government and the private sector to develop a major public housing scheme in 2013, analysts have said Manama will be forced to look towards private business to compensate for the reduction in government capital expenditure.
Jarmo Kotilaine, chief economist at the country’s Economic Development Board, said increasing private investment, foreign direct investment and funding from the GCC Development Fund will help finance new infrastructure schemes, filling the gaps left by government cuts.
For the rest of 2015, foreign funding and the private sector are expected to help the construction industry overcome any drops in government capital expenditure due to lower oil prices.
The Ministry of Finance also confirmed that an average of $10 million a year from GCC funds will be spent on road projects over the next seven years. The development of the new airport is funded by Abu Dhabi and a new causeway is being built through financing from Riyadh. There have also been attempts by Bahrain at boosting the country’s financial services with an emphasis on Islamic finance.
“Islamic finance can play a central role in creating an alternative, more resilient economic and financial system,” Rasheed Mohammed al-Maraj, governor of the Central Bank of Bahrain, told delegates at the Global Islamic Investment Gateway conference in Bahrain on March 3rd. “The core of Islamic finance is based on real economy transactions, rather than on speculative financial transactions or financial engineering.”
In its latest report, international ratings agency Fitch downgraded Bahrain’s long-term foreign currency Issuer Default Rating (IDR) to “BBB minus” from “BBB” and long-term local currency IDR to “BBB” from “BBB plus”.
The report also highlighted that the emergence of sizeable fiscal deficits has led to a rapid rise in the general government debt burden, which reached 45.1% of GDP in 2014. Fitch forecasts the government debt will continue climbing, reaching 54.2% of GDP in 2015 and 58.6% of GDP in 2016 on current policy settings.