GCC Insights: Projected Bahrain budget deficit can be overcome

Bahrain stands out within the GCC as it publishes budget figures for two years at the same time. The practice provides investors a direction of government plans.

However, one such drawback is volatility of oil prices affects revenue predictions - currently petroleum sector contributes nearly 60 per cent of treasury income.

The budget for fiscal years 2003 and 2004 points out to steady spending, which sets the government agenda for the next two years. In Bahrain, government expenditure is essential for achieving satisfactory economic growth, not least because the private sector takes the lead from the public sector.

For 2003, revenue is projected at BD797 million and spending at BD1,114 million, leaving behind a deficit of BD317 million ($843 million). For 2004, revenue is projected at BD806 million and spending of BD1,137 million, showing a shortage of BD331 million ($880).

The budget forecasts spending of BD330 millon per each of 2003 and 2004 for development projects, double the amount originally planned for each of 2001 and 2002. The trend reflects the government's desire to realise speedy economic development and to create jobs for locals.

The ministry of finance and national economy has an ambitious programme of capital projects worth BD1 billion for the period 2001-04. Of this, some BD300 million is allocated for electricity and water projects to meet growing demand.

Also, BD140 million is set aside for housing schemes - the government has promised decent living conditions for the citizens as part of sweeping socio-economic reforms. Other projects are related to the country's infrastructure such as the construction and maintenance of roads and causeways and expansion of the sewerage network.

Actual deficit is likely to be less than projected due to oil prices. Oil income traditionally accounts between 50-70 per cent of total revenue, and hence Bahrain financing is at the mercy of oil prices, which fluctuate in the international markets. For 2003 and 2004, the government has calculated oil price of $18 per barrel. However, analysts are forecasting oil price above $20 per barrel in both years.

Nevertheless, financing the deficit can be covered via several means. For one, the government can rely on the surplus put aside in 2001 and 2000. For another, the government can supplement this by the issuance of securities. Bahrain Monetary Agency (BMA) regularly issues treasury instruments sold primarily to financial institutions operating in Bahrain. There are some 180 financial institutions in Bahrain providing commercial, investment and offshore as well as Islamic banking services.

Additionally, the government has recently approved a plan for raising long-term $500 million bonds. BNP Paribas and Schroder Salomon Smith Barney have been selected as lead-arranging agents.

Timing of the bond coincides with positive ratings received from both Standard & Poor's and Moody's Investors Service. In July, S&P assigned 'A' for Bahrain's long-term local currency rating, 'A-2' for its short-term foreign currency and 'A-1' for the short-term local currency debt.

Then in August, Moody's upgraded Bahrain's foreign-currency ceiling for bonds to Baa3/P-3 from Ba1/NP and its ceiling for foreign currency onshore bank deposits to Baa3/P-3 from Ba2/NP.

Additionally, Bahrain can rely on support from friendly governments such as Saudi Arabia, Kuwait and the UAE. Also, Bahrain can get soft loans from GCC-based funds notably those of Kuwait and Saudi Arabia.

The government has ruled out the introduction of taxes for personal or corporate income to augment budget revenue, fearing that this would adversely affect Bahrain's competitive position in a region where taxes are not common.

Yet, if recent history is any guide, projected budget deficit could be overcome. For 2002, the government has projected deficit of BD370 million, but analysts are expected to be in balance.

In 2001, the treasury recorded a surplus of BD148.1 million compared with a projected deficit of BD242 million - a position was reached as a result of firmer oil prices combined with cautious spending.