Dec. 3 (Bloomberg) -- Bahrain, the Persian Gulf nation whose credit rating was cut in September, will revamp subsidies that have led to excessive consumption of energy and some foods, Central Bank Governor Rasheed al-Maraj said.
“We are very much aware that the level of consumption in energy and some of the foods is not sustainable,” al-Maraj, 57, said in an interview in Manama, Bahrain, yesterday. “The philosophy of directing the subsidies toward the needy is now being reflected into the programs.”
The changes may start as early as this month and will include “certain mitigations” to avoid fueling inflation, al-Maraj said. Inflation was 3.8 percent in October, and al-Maraj said he expects a year-end rate near the International Monetary Fund’s forecast of 2.7 percent.
The IMF has repeatedly urged Persian Gulf countries to reduce energy subsidies, saying even oil-rich nations can’t afford to keep increasing public spending. The IMF says Bahrain’s budget deficit will widen to 5 percent of gross domestic product next year, almost double the 2012 gap. Bahrain is among the Gulf states that boosted outlays to ward off the political unrest spreading through the Arab world in 2011.
King Hamad bin Isa Al Khalifa ordered a handout of 1,000 dinars ($2,650) per family in February that year, a month before Bahrain declared a state of emergency as protesters led by members of the Shiite majority demanded more civil rights. The Sunni monarchy, aided by Saudi Arabia, suppressed the sometimes violent protests with force. Sporadic demonstrations and clashes continue.
Bahrain last year started disbursing compensation to the families of some killed during the unrest. The initiative followed recommendations from an international commission that investigated possible human-rights abuses in February and March 2011. At least 35 people were killed during the rallies and an ensuing crackdown, the commission said.
Moody’s Investors Service says Bahrain’s “unsettled politics” is the biggest constraint on creditworthiness. The ratings company lowered Bahrain to Baa2, the second-lowest investment grade, in September, citing budget constraints and a weaker economic outlook.
The downgrade hasn’t deterred investors. The 6.125 percent bonds Bahrain sold in July have gained since the Moody’s decision, pushing the yield down 69 basis points in the period to 5.65 percent at the close today.
Al-Maraj said Moody’s based its decision on “an inconclusive picture” of Bahrain’s politics and economy. “If they get their information from sources that are not reliable, that’s not our problem,” he said.
Bahrain’s growth has revived after slowing amid the political tensions of 2011. GDP increased 3.4 percent last year, according to central bank data, and al-Maraj forecast an expansion of 4 percent this year.
The Central Bank of Bahrain last cut its key interest rate -- the one-week deposit facility -- by a quarter percentage point to 0.5 percent in 2009. Like many countries in the region with currencies linked to the U.S. dollar, Bahrain’s monetary policy often takes its cues from the U.S. Federal Reserve.
Saudi Arabia, whose riyal is pegged to the U.S. dollar, has kept its repurchase rate at 2 percent since 2009.
“I don’t see in the foreseeable future, at least in the next year, we will see any change in the interest rate direction because we know the economic recovery in the world is fragile and slow,” al-Maraj said. “Although our economy is moving at a faster rate than international economies, but we think there is no inflationary pressure internally to prompt us to take any action.”
The central bank is encouraging Bahrain’s financial sector to consolidate, and there are “a few initiatives” under way, he said. Khaleeji Commercial Bank and Bank Alkhair BSC have already announced a possible merger.
The nation’s Islamic banks, about a quarter of the total number of lenders, have a “slightly higher” non-performing loan ratio than the 4 percent figure for conventional banks, al-Maraj said. The Islamic lenders may see the ratio improve this year because real-estate prices are rising, he said.
“The rise in deposits is a reflection of market confidence in our financial system,” al-Maraj said.
“This gives probably a verdict against all those who have come up with negative views of Bahrain and its economic and political stability,” he said. “This is the market verdict.”
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