Bahrain’s economy is going through a phase of promises and challenges concurrently. Recent positives entail the possibility of setting up a second causeway linking it to Saudi Arabia and the construction of a brand new airport.
The adversities emerge from an ever-rising public debt mountain. Limited information is known about the plans for a new airport. However, specific details have emerged of the second intended bridge with Saudi Arabia.
By one account, the total cost of the causeway is projected at $5 billion, which is inclusive of the necessary infrastructure for an eventual train link up with fellow Gulf Cooperation Council countries. The existing King Fahd causeway is a lifeline for Bahrain’s economy, and the second should further strengthen economic prospects.
Saudi and other GCC nationals plus tourists using the causeway are essential for the well-being of numerous economic sectors like hospitality. Yet, the bridge has of late been experiencing a backlog of traffic delays involving trucks. Accordingly, it makes sense to have separate bridges for civilian and commercial uses.
While these are good tidings for the economy, Bahrain must face an increasingly serious debt overhang. Outstanding debt stood at $11.2 billion at the end of 2012, or 40 per cent of the country’s gross domestic product (GDP). The figure grew to $13.2 billion in 2013, compromising 44 per cent of GDP.
Still, debt levels are projected to reach $15.7 billion by end-2014 representing just under half of the GDP. Not long ago, the IMF issued a public warning of debt jumping above $20 billion by 2018, therefore superseding the 60 per cent limit of the GDP, as stipulated by the Gulf Monetary Union scheme.
Looking back, public debt comprised a mere 10 per cent of the country’s GDP in 2008. Clearly, the pace of the rising public debt is an alarming one and with no end in sight of this burden.
What’s more, Bahrain is reportedly looking for means to raise at least $500 million, even $800 million, in the international capital markets. There is a desire to seek a long-term debt instrument, something like a 30-year bond, a novelty for Bahrain, ostensibly to ensure sustained use of the funds.
In order to entice potential investors, the authorities may be prepared to pay interest in excess of 6 per cent. However, this is not entirely surprising at all considering the country’s credit ratings.
Unlike the rest of GCC countries, Bahrain has ratings outside of the A category of Moody’s and Standard & Poor’s, the two leading agencies in the field. More specifically, Bahrain has ratings of Baa2 and BBB on the Moody’s and S&P scales, respectively.
Moody’s maintains a negative outlook for Bahrain’s economy, the only case among the GCC member states.
Sadly, Bahrain ended up being the sole GCC country suffering from budgetary shortage in 2013. The deficit amounted to $1.1 billion in fiscal year 2013, a substantial amount by virtue of compromising around 3.7 per cent of the country’s GDP.
The GMU plan restricts budgetary deficit to 3 per cent of the GDP. It is believed the fiscal break even point at above $118 per barrel, something not possible in the current market conditions.
The budget for fiscal year 2014 was prepared using an average of $90 per barrel. Undoubtedly, this is not a conservative figure by regional standards, where GCC countries tend to assume relatively low average oil prices when preparing budgets.
Overall, the Bahraini economy will see its share of ups and downs. How it manages the downs will be interesting.
The writer is a Member of Parliament in Bahrain.