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Budget deficit is expected to shrink

Bahrain Business
Mon, 15 Jan 2018
1 of 2

MANAMA: The budget deficit is expected to gradually narrow given ongoing fiscal consolidation efforts as well as some improvement in revenues.

However, it will still remain large at around 9.7 per cent and 8pc of GDP in 2018 and 2019, respectively.

Fiscal reform has so far been centred on rationalising subsidies, starting with lifting of support for meat products and a new pricing system for fuel to reduce subsidy costs in 2015.

In 2016, it approved the removal of subsidies on housing utilities.

But unlike other GCC countries, government spending in Bahrain is virtually unchanged from 2014 levels, highlighting the challenges in cutting areas such as salaries and subsidies.

The rollout of VAT should raise around $300 million (approximately 1pc of GDP) in additional tax revenue per year.

Following a 4.4pc YoY estimated rise in public spending in 2017, the state budget pencils in a 2.9pc YoY decline for 2018, on the back of a drop in current expenditures.

Capital expenditure growth is expected to be supported by GCC grants and come in at around 2-3pc YoY in 2018 and 2019.

With the cumulative sum of GCC grant allocations currently standing at less than $1.3bn year-to-date, according to the Economic Development Board, active projects are projected to continue to grow at healthy rates.

With the budget deficit hovering at high levels, the government will continue to look to domestic and international bond markets to plug the shortfall, said the report.

The latest issue came in late 2017 with a $3 billion three-tranche bond, at comparatively high premiums of 5-8pc and maturities ranging between seven to 30 years.

Assuming an average interest rate on government debt of around 5pc, this implies debt interest payments of around 2-3pc of GDP.

Government debt now stands about 10pc points higher at around 90pc of 2017 GDP.

This figure is expected to rise to above 100pc of GDP by 2019, the report said.

Growth in credit to businesses is expected to offset the continued weakness in personal loans growth, thanks to an ongoing pickup in lending activity in the construction sector.

However, credit to businesses – weak in recent years – has picked up of late, climbing above 6pc YoY in September last year for the first time since 2012.

Interest rates are expected to continue to rise, reflecting in part rises in official policy rates.

The policy rate, currently at 1.75pc, is expected to increase by a further 50 bps in 2018 and in 2019, in tandem with increases in the US federal funds rate.

Weaker foreign reserve levels are applying pressure on the currency peg to the US dollar. But it is expected that the government will remain committed to the peg, NBK said.