IMF Says Bahrain’s Growing Debt May Be Unsustainable by 2018

Bahrain must urgently cut spending or risk unsustainable public debt as its fiscal deficit widens and oil prices decline, according to the International Monetary Fund.

The smallest Gulf crude producer needs “gradual fiscal consolidation” equal to 7.7 percent of economic output over the next six budget years to contain its government debt at 40 percent of gross domestic product, the Washington-based fund said in report released late yesterday. It also recommended that Bahrain pare its fiscal stimulus to 0.9 percentage points of non-oil GDP from 2.1 percentage points, it said.

“There is now an urgent need to initiate a medium-term fiscal strategy with a view to adopt a gradual retargeting of subsidies, contain public-sector wage increases, increase non-oil revenues, rationalize capital expenditures, and place the pension fund on a sustainable path,” the report said. It did not give a 2013 budget deficit forecast and projected public debt could grow to 61 percent of GDP by 2018 without a stricter fiscal program.

Bahrain’s outstanding debt including interest is about $11.8 billion, with more than $3 billion due this year, according to data compiled by Bloomberg. The cost of insuring its debt against default has risen 15 basis points so far this year to 205 basis points on May 15, according to data compiled by Bloomberg. Its nominal GDP at the end of 2012 was $27.1 billion, according to preliminary data in the IMF report.

Bahrain’s economic growth slowed in 2011 after the government declared a state of emergency and relied on military support from neighboring countries to quell protests during the Arab Spring rebellions. Non-oil activity rebounded last year on government spending, and Bahrain’s current account remained “strong” at an estimated 18.2 percent of GDP, the IMF report said.

The nation’s economy may expand 4.2 percent in 2013, the IMF said in its World Economic Outlook in April, two percentage points less than the government forecast. Standard & Poor’s cited improvements in the “political, economic and fiscal situation” when it revised the kingdom’s credit outlook to stable from negative in January. Bahrain also managed a better-than-expected budget deficit of 2.6 percent in 2012, the fund said.

Still, investment in Bahrain’s private sector remains low, which may translate to non-oil growth of less than 4 percent in 2013, the fund said in its report yesterday. Bahrain is also vulnerable to oil price fluctuations, especially after its fiscal break-even price reached $115 in 2012, according to the IMF.

Crude oil has declined 2.2 percent so far this week to $93.91 a barrel at 10:08 a.m. in Dubai.

To contact the reporter on this story: Dana El Baltaji in Dubai at delbaltaji@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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