Event

The first round of the Bahraini parliamentary elections was held on Saturday 24 November 2018. Main opposition parties being banned from participating, the elections are not expected to bring forward any surprises because the role of the 40 parliament members is limited as well. The second round is planned on the 1 December 2018. These elections come at a time when the country is facing significant economic challenges, which are caused by the government’s failure to keep a lid on spending and failure to increase fiscal revenues ever since oil prices decreased four years ago. Increased uncertainties on financial markets about whether Bahrain would be able to finance a series of forthcoming debt repayments, including a USD 750 million sovereign sukuk repayment, have led Saudi Arabia, Kuwait and the United Arab Emirates to step in with a USD 10 bn bailout package in the beginning of October 2018.

Impact

Since oil prices collapsed in mid-2014, public finances have deteriorated significantly. The impact of the reduction in oil prices on Bahraini public finances was particularly strong given that while non-oil GDP represented 80% of the economy, oil income represented close to 90% of government revenues at the end of 2013. This situation led to ballooning public deficits, which reached 18.5% of GDP at the end of 2015 and was still 14.3% at the end of 2017. The IMF projects that for 2018 the deficit will be 8.9% of GDP. This reduction is due to both the rise in oil prices and to a number of consolidation measures taken by the government. As a result, public debt level has doubled from 44.1% of GDP at the end of 2014 to 88.9% at the end of 2017. Given the need to refinance its debt, it has been important for Bahrain to keep access to international capital markets. However, market confidence has been under pressure considering the deteriorating public finances and the lack of deep reforms. This was evident in March of this year when the country struggled to raise capital on international markets and in June when the spread on its five-year CDS rose to above 600 bp, which is a very high level. In response to this, the three GCC countries announced a bailout package in July which was concluded in October. The aim of this package is to facilitate a structural consolidation of public finances by raising non-oil revenues and by reducing expenditure. Measures such as the GCC-wide 5% VAT, that will go into effect on the 1 January 2019, should raise tax revenues, but much more will be needed, and it is unsure whether the government will be able to implement the needed reforms.

Credendo’s short-term political risk classification remains strongly under pressure given low foreign exchange reserves (currently sufficient to cover only 1.1 month of import), and difficulties to access financial markets. At the same time, medium- to long-term political risk classification remains also under pressure given the increase of the country’s external debt and external debt service. Over time the expected revenue generated by the gas field that was discovered in April 2018 should increase fiscal space. However, it currently remains unclear which share of the field is commercially exploitable and at what price.

Aside from economic troubles, the country is also struggling with recurring protests, which originated in the Arab Spring of 2011, when mass protests demanding political reform were initially supressed with the help of Saudi Arabia. The protests were driven by the Shia majority in the country and have continued since then on a sporadic basis throughout the country. Given that the main Shia opposition party was not allowed to participate in the elections, there is little prospect of reconciliation between the majority Shia population and the ruling Sunni Khalifa family. This will therefore continue to put pressure on the risk of political violence in the country, which currently remains in category 5, even though sectarian divisions and unrest are not expected to reach politically destabilising levels.

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com