Saudi Arabia, the UAE and Kuwait have pledged USD10bn in financial assistance to Bahrain over five years, in an effort to stabilise its vulnerable fiscal finances. In line with our expectations and as we have regularly argued, the financial support package will be “conditional” in nature as it requires the sovereign to deliver a comprehensive range of fiscal consolidation measures through a “fiscal balance programme”, for funding to be provided.
The programme aims to balance the fiscal budget by 2022 (Bahrain’s fiscal deficit was USD5.3bn; -15.1% of GDP last year). While few granular details were disclosed, the USD10bn support package will span over five years and include loans, deposits and grants, with the Arab Monetary Fund acting as an advisory body. It aims for a total fiscal consolidation of USD2.1bn (5.5% of GDP) annually and covers half the government’s financing needs, including debt repayments – with the other half financed predominantly through debt issuance.
The details of Bahrain’s “fiscal balance programme”. According to the new formed “fiscal balance programme”, the initiatives are six-fold and designed to align fiscal consolidation (through non-oil revenue generation and expenditure rationalisation), with economic growth. These measures also included (i) the establishment of a series of new units designed to monitor spending; (ii) streamline processes; (iii) enhance transparency; and (iv) increase efficiencies across government. These include (a) the establishment of internal audit and central government procurement units within the Ministry of Finance (MoF); and (b) a new Debt Management Office (DMO). The specific six-fold initiatives are:
- Public sector reductions. Public sector reduction, though six dedicated government task forces.
- Voluntary retirement scheme. A voluntary retirement scheme for government employees, providing participants with early access to end-of-service packages and the opportunity to utilise their skills in the private sector.
- Ensuing the Electricity and Water Authority (EWA) is self-sufficient by 2022. Balancing the EWA‘s expenditures and revenues by 2022, incentivising sustainable consumption to support Bahraini’s in their first household.
- Streamline the distribution of cash subsidies to low income citizens. Streamlining the distribution of cash subsidies, consolidating and redirecting cash subsidies towards eligible citizens to ensure fairness and improve quality of life.
- Reduce inefficient government operational expenditure. Targeting inefficient operational government expenditures, ensuring spending efficiency and strengthening accountability within government departments.
- Simplifying government processes. Reducing bureaucratic government processes and increasing non-oil revenues, to drive economic growth, diversify government income streams and align non-oil revenue with positive economic growth.
GCC support had to change this time to become conditional from unconditional, given the region is enduring fiscal austerity. Saudi Arabia’s support for Bahrain, in particular, has changed in our view. Given the Saudi leadership is more pragmatic, less committed to old norms of solidarity and more importantly, it cannot be viewed as providing assistance to an ally (Bahrain) that fails on reform implementation whilst its own population in Saudi Arabia is adhering austerity measures. The shift from implicit and unconditional support to a more explicit and conditional assistance is thus evident with the announcement of the “fiscal balance programme”.
The combinations of the USD10bn assistance package and the “fiscal balance programme” will ensure timely repayment on the sovereign’s most immediate financial repayments. Most immediately, the USD10bn financial assistance package is timely enough to adhere to a series of forthcoming debt repayments, including a USD750m sovereign Sukuk repayment due on 22 November 2018, followed by USD727.4m and USD1.9bn worth of sovereign bond repayments due in 2019 and 2020, respectively. Moreover, given our models suggest that Bahrain’s fiscal financing needs could amount to USD20.4bn between 2019-22, and as such, the USD10bn in assistance will cover around half of the country’s gross financing needs until 2022. The focus of attention will now be on reform execution in line with the “fiscal balance programme” to ensure that Bahrain’s operating model shifts to a more sustainable footing away from the cyclical reliance of hydrocarbons.
Overall assessment. Bahrain remains the weakest spot in the GCC region, with a current fiscal breakeven oil price of USD113.0/b. Whilst we take comfort from the conditionality of the USD10bn financial assistance package in line with the fiscal reform programme, our concerns remain on reform execution as motivation for reform and diversification is closely correlated with oil prices, and as oil prices now at four year highs, pressure for reforms dissolves, leading to slippage. Credibility of the fiscal balance programme reform programme will be bought into question if the authorities fall short in their ability to deliver on their plans as they have articulated their intention that this time – fiscal consolidation to transform the country onto a more sustainable footing – is different. Granted, it is expected that there will be some scale and magnitude of reform fatigue with the plans announced, but the importance of fiscal austerity measures as a means of structurally moving away from the reliance of oil, cannot be overlooked.
- Ehsan Khoman, head of MENA Research & Strategy, MUFG Bank Ltd